The Price of Safety: The Evolution of Municipal Bond Insurance Value

Kimberly Cornaggia (), John Hund () and Giang Nguyen ()
Additional contact information
Kimberly Cornaggia: Smeal College of Business, Pennsylvania State University, University Park, Pennsylvania 16802
John Hund: Terry College of Business, University of Georgia, Athens, Georgia 30605
Giang Nguyen: Smeal College of Business, Pennsylvania State University, University Park, Pennsylvania 16802

Management Science, 2024, vol. 70, issue 4, 2330-2354

Abstract: Economic theory predicts that bond insurance lowers issuers’ financing costs by resolving asymmetric information and mitigating credit risk. With comprehensive data over the last 36 years, we find increasingly diminished empirical support for these models. The value of insurance in resolving asymmetric information beyond that resolved by credit ratings and other observable bond characteristics is economically minimal. The average gross value of insurance ranges from 4 to 14 bps when bond insurers offer Aaa-rated coverage. However, this gross value becomes insignificant after 2008 when Aaa-rated insurance no longer exists. Evidence suggests that the lack of insurance benefit in the postcrisis period is attributable to the deteriorated creditworthiness of insurance companies. Examining noninterest saving explanations for the continued use of insurance in the no-Aaa insurance market, we find evidence that issuers purchase insurance out of habit (with insurance value most diminished for habitual purchasers with low governance quality) and for the convenience it affords in default, but no evidence that insurance improves secondary market liquidity.

Keywords: municipal markets; financial guaranty; insurance value; asymmetric information (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2023.4813 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:4:p:2330-2354

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().