The Politics of Government Financial Management: Evidence from State Bonds
National University of Singapore (NUS) - Department of Finance
October 7, 2016
Paolo Baffi Centre Research Paper No. 2011-102
In the $3.7 trillion U.S. state-and-local-government-bond market, greater issuance costs (lower issue-prices and greater underwriting fees) benefit financial institutions, while costing taxpayers. Campaign contributions by politically supportive underwriters can be associated with lower issuance costs. Alternatively, contributions can influence a politician to accept greater costs. This paper’s evidence suggests that contributions influence politicians: In the absence of an underwriter auction, underpricing increases with the chosen underwriter’s contributions relative to others. Moreover, the difference in the fees charged by contributing underwriters and those charged by non-contributing underwriters is 2.9%. In the presence of an underwriter auction, these results are statistically insignificant.
Number of Pages in PDF File: 64
Keywords: Government Financial Management, Security Issuance, Underpricing, Campaign Contributions.
JEL Classification: H74, P16, G24
Date posted: July 16, 2011 ; Last revised: January 13, 2017