Journal
JOURNAL OF FINANCIAL ECONOMICS
Volume 132, Issue 2, Pages 404-426Publisher
ELSEVIER SCIENCE SA
DOI: 10.1016/j.jfineco.2018.10.009
Keywords
Default risk; Government policy; Municipal bonds; Creditor protections
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Policies on financially distressed municipalities differ across US 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. (C) 2018 Elsevier B.V. All rights reserved.
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