Heterogenous Taxes and Limited Risk Sharing: Evidence from Municipal Bonds

52 Pages Posted: 9 Dec 2015

See all articles by Tania Babina

Tania Babina

Columbia Business School - Finance and Economics

Chotibhak Jotikasthira

Southern Methodist University (SMU) - Finance Department

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School; Frank Hawkins Kenan Institute of Private Enterprise

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2015

Abstract

Heterogeneity in the taxation of asset returns can create ownership clienteles. Using a simple model, we demonstrate that an important consequence of tax-policy-induced ownership segmentation is to limit risk-sharing, creating regions of the aggregate demand curve for the asset that are "downward-sloping.'' As a result, the constraints of the ownership clientele impact the asset price response to variations in asset supply and demand, and make the asset's price more sensitive to movements in idiosyncratic risk. We test these predictions on U.S. municipal bonds, where cross-state variation in state tax privilege policies results in different levels of home-state-biased ownership of local municipal bonds. In states with high tax-induced ownership segmentation, we find greater susceptibility of municipal bond yields to demand and supply variation, heightened sensitivity of muni yields to local political uncertainty, and greater difficulties in raising capital for public projects.

Keywords: clientele effects, fire sales, government debt, municipal bonds, ownership segmentation, public finance, Taxes

JEL Classification: F30, G12, G15, H63

Suggested Citation

Babina, Tania and Jotikasthira, Chotibhak and Lundblad, Christian T. and Ramadorai, Tarun, Heterogenous Taxes and Limited Risk Sharing: Evidence from Municipal Bonds (December 2015). Available at SSRN: https://ssrn.com/abstract=2701245

Tania Babina (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Chotibhak Jotikasthira

Southern Methodist University (SMU) - Finance Department ( email )

United States

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-8441 (Phone)

Frank Hawkins Kenan Institute of Private Enterprise ( email )

Campus Box 3440, The Kenan Center
Chapel Hill, NC 27599-344
United States

Tarun Ramadorai

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

HOME PAGE: http://www.tarunramadorai.com

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

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