What Drives Financial Reform? Economics and Politics of the State-Level Adoption of Municipal Bankruptcy Laws

52 Pages Posted: 4 Dec 2015

See all articles by Stefano Rossi

Stefano Rossi

Bocconi University; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Hayong Yun

Michigan State University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: December 2, 2015

Abstract

We investigate economic and political theories of financial reform to analyze state-level adoption of municipal bankruptcy laws (Chapter 9). Using a dynamic Cox hazard model, we find that interest group factors related to the relative strength of potential losers (labor unions) and winners (bond investors), courts’ efficiency, and trust in non-opportunistic behavior by local government explain the timing of Chapter 9 adoptions between 1980 and 2012. Similar factors also explain congressional voting on municipal bankruptcy law. After Chapter 9 adoption, municipal bond spreads decrease and firms experience higher revenues, profits, and investments, particularly in states in which more bond proceeds are used by the private sector. Our findings support political and economic theories of financial reform, and highlight a novel spillover channel from the public to the private sector.

Keywords: bankruptcy, Chapter 9, municipal bonds, judicial efficiency, labor union

JEL Classification: D86, G33, G34, K22

Suggested Citation

Rossi, Stefano and Yun, Hayong, What Drives Financial Reform? Economics and Politics of the State-Level Adoption of Municipal Bankruptcy Laws (December 2, 2015). Available at SSRN: https://ssrn.com/abstract=2698665 or http://dx.doi.org/10.2139/ssrn.2698665

Stefano Rossi

Bocconi University ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Hayong Yun (Contact Author)

Michigan State University - Department of Finance ( email )

645 N Shaw Lane, Room 339
East Lansing, MI 48824-1122
United States
517-884-0549 (Phone)

HOME PAGE: http://https://sites.google.com/site/hayongy/

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