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Municipal borrowing costs and state policies for distressed municipalities

Pengjie Gao, Chang Lee and Dermot Murphy

Journal of Financial Economics, 2019, vol. 132, issue 2, 404-426

Abstract: 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.

Keywords: Default risk; Government policy; Municipal bonds; Creditor protections (search for similar items in EconPapers)
JEL-codes: G12 G18 H74 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:eee:jfinec:v:132:y:2019:i:2:p:404-426