Political Uncertainty and Public Financing Costs: Evidence from U.S. Gubernatorial Elections and Municipal Bond Markets

62 Pages Posted: 26 Jan 2012 Last revised: 11 Feb 2019

See all articles by Pengjie Gao

Pengjie Gao

University of Notre Dame - Mendoza College of Business

Dermot Murphy

University of Illinois at Chicago

Yaxuan Qi

City University of Hong Kong (CityU) - Department of Economics & Finance

Date Written: February 9, 2019

Abstract

We investigate how political uncertainty around U.S. gubernatorial elections affects local government borrowing costs. Municipal bond yields sharply increase by 7 basis points before an election and reverse afterward. This political risk premium is higher during economic downturns and close elections, especially when voters are more risk averse, and lower for states with balanced budget restrictions or financial disclosure requirements. Insurance mitigates the political uncertainty effect, but only pre-2008 when insurers were solvent. Pre-election institutional trading demand also significantly decreases. Overall, our evidence indicates that government debt is more costly and difficult to issue when political uncertainty is high.

Keywords: Political Uncertainty, Elections, Public Financing Costs, Municipal Bonds

JEL Classification: G12, G18, G28

Suggested Citation

Gao, Pengjie and Murphy, Dermot and Qi, Yaxuan, Political Uncertainty and Public Financing Costs: Evidence from U.S. Gubernatorial Elections and Municipal Bond Markets (February 9, 2019). Available at SSRN: https://ssrn.com/abstract=1992200 or http://dx.doi.org/10.2139/ssrn.1992200

Pengjie Gao

University of Notre Dame - Mendoza College of Business ( email )

246 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
(574) 631-8048 (Phone)

HOME PAGE: http://​sites.google.com/site/gpengjie/

Dermot Murphy

University of Illinois at Chicago ( email )

2114 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
312-355-4372 (Phone)

HOME PAGE: http://sites.google.com/site/murphyderm

Yaxuan Qi (Contact Author)

City University of Hong Kong (CityU) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

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