Municipal Borrowing Costs and State Policies for Distressed Municipalities

59 Pages Posted: 30 Sep 2016 Last revised: 11 Jul 2018

See all articles by Pengjie Gao

Pengjie Gao

University of Notre Dame - Mendoza College of Business

Chang Lee

University of Illinois at Chicago - Department of Finance

Dermot Murphy

University of Illinois at Chicago - Department of Finance

Date Written: May 19, 2017

Abstract

Policies on financially distressed municipalities differ across U.S. states, with some allowing unconditional access to Chapter 9 bankruptcy (“Chapter 9 states”) and others having proactive policies to assist distressed municipalities (“Proactive states”). These differences significantly affect borrowing costs. In Chapter 9 states, local municipal bond yields are higher, more cyclical, and more sensitive to default events than Proactive states. Default events have a contagion effect in Chapter 9 states, but not Proactive states. Lower local borrowing costs in Proactive states come at the expense of the state via higher intergovernmental revenue transfers in times of weak economic conditions.

Keywords: Default Risk, Municipal Bonds, Government Policy, Risk Sharing

JEL Classification: G12, G18, H74

Suggested Citation

Gao, Pengjie and Lee, Chang and Murphy, Dermot, Municipal Borrowing Costs and State Policies for Distressed Municipalities (May 19, 2017). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2845515 or http://dx.doi.org/10.2139/ssrn.2845515

Pengjie Gao (Contact Author)

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/

Chang Lee

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States

Dermot Murphy

University of Illinois at Chicago - Department of Finance ( email )

2431 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

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