Marijuana Liberalization and Public Finance: A Capital Market Perspective on a Public Health Policy

62 Pages Posted: 6 Nov 2019

See all articles by Stephanie F. Cheng

Stephanie F. Cheng

Tulane University - A.B. Freeman School of Business

Gus De Franco

Tulane University - A.B. Freeman School of Business

Pengkai Lin

Tulane University, A.B. Freeman School of Business, Students

Date Written: October 22, 2019

Abstract

Marijuana liberalization has generated heated debates over its potential benefits and costs. However, limited attention has been given to its capital market implications. We provide the first evidence on one cost of liberalizing cannabis imposed by municipal bond investors. Making use of the staggered passage of state legislation, we show that legalization of marijuana for medical use leads to a 7-bps increase in the offering spread, an 11-bps increase in the trading spread, and a 4-bps increase in the gross spread for state bonds. To strengthen the causal inference, we employ two additional identification strategies — a test that compares the borrowing costs of adjacent counties across state borders and a test that compares the borrowing cost of two states in which one state passed and the other rejected marijuana laws with narrow margins in ballots. The evidence collectively suggests that municipal bond investors impose higher borrowing costs on local governments in states that have legalized medical marijuana.

Keywords: Public Finance, Municipal Bond, Marijuana, Cannabis, Public Health Policy

JEL Classification: E60; G28; H74; H75; I18

Suggested Citation

Cheng, Stephanie F. and De Franco, Gus and Lin, Pengkai, Marijuana Liberalization and Public Finance: A Capital Market Perspective on a Public Health Policy (October 22, 2019). Available at SSRN: https://ssrn.com/abstract=3474119

Stephanie F. Cheng (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Gus De Franco

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Pengkai Lin

Tulane University, A.B. Freeman School of Business, Students ( email )

7 McAlister Drive
New Orleans, LA
United States

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