Impact of Bankruptcy Eligibility Requirements and Statutory Liens on Borrowing Costs

27 Pages Posted: 5 Dec 2017

See all articles by Tima T. Moldogaziev

Tima T. Moldogaziev

Pennsylvania State University

Sharon N. Kioko

Syracuse University - Maxwell School of Citizenship and Public Affairs

W. Bartley Hildreth

Georgia State University - Andrew Young School of Policy Studies

Date Written: Winter 2017

Abstract

While bankruptcy protection remains an instrument of last resort, a recent wave of petitions has aroused the interest of key participants in the municipal bond market. To date, 12 states unconditionally authorize municipalities to file for bankruptcy protection, 15 states require that municipalities satisfy certain threshold requirements, while the remaining 23 states either explicitly prohibit or have not specifically provided this authority to municipal governments. As bankruptcy protection rules influence bondholder risk exposures, we empirically test the significance of the state‐specific bankruptcy eligibility requirements on borrowing costs. In a representative sample of general obligation bonds, empirical results suggest that municipalities eligible to file for bankruptcy protection pay a premium. The premium is higher if issuers are unconditionally authorized to file for bankruptcy protection, especially for debt with longer maturities. Findings also show that there are benefits associated with statutory liens; however, these benefits diminish with maturity.

Suggested Citation

Moldogaziev, Tima T. and Kioko, Sharon N. and Hildreth, W. Bartley, Impact of Bankruptcy Eligibility Requirements and Statutory Liens on Borrowing Costs (Winter 2017). Public Budgeting & Finance, Vol. 37, Issue 4, pp. 47-73, 2017. Available at SSRN: https://ssrn.com/abstract=3081278 or http://dx.doi.org/10.1111/pbaf.12175

Tima T. Moldogaziev (Contact Author)

Pennsylvania State University ( email )

324 Pond Lab
School of Public Policy
University Park, PA 16802
United States
16802 (Fax)

Sharon N. Kioko

Syracuse University - Maxwell School of Citizenship and Public Affairs ( email )

400 Eggers Hall
Syracuse, NY 13244
United States

W. Bartley Hildreth

Georgia State University - Andrew Young School of Policy Studies ( email )

14 Marietta Street, NW
Atlanta, GA 30303-3992
United States
404-413-0271 (Phone)

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