Do Taxes or Information Drive Demand for Bond Insurance?

26 Pages Posted: 22 Mar 2018

See all articles by Mattia Landoni

Mattia Landoni

Southern Methodist University (SMU) - Finance Department

Date Written: September 15, 2017

Abstract

I perform the first-ever test of the tax arbitrage theory of bond insurance (Nanda and Singh, 2004) using a complete dataset of all 2015 municipal bond issues. For bonds that are insured in practice, the tax-arbitrage value created by insurance is negligible and, under a realistic calibration, negative. Consistent with this fact, and contrary to the theory's predictions, taxable municipal bonds are insured as often as tax-exempt ones. Bond insurance is concentrated among small, unrated issues; for the smallest of these, the insurance premium is likely cheaper than rating agency fees. This evidence suggests that insurance creates value by producing information.

Keywords: bond, insurance, tax, information

JEL Classification: G18, G22, G28, G33, H26, H74, K34

Suggested Citation

Landoni, Mattia, Do Taxes or Information Drive Demand for Bond Insurance? (September 15, 2017). Available at SSRN: https://ssrn.com/abstract=3143160

Mattia Landoni (Contact Author)

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

United States

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