Corruption, Political Connections, and Municipal Finance

Authors: Butler, Alexander W.; Fauver, Larry; Mortal, Sandra

Source: Review of Financial Studies, Volume 22, Number 7, 1 July 2009 , pp. 2673-2705(33)

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Abstract:

We show that state corruption and political connections have strong effects on municipal bond sales and underwriting. Higher state corruption is associated with greater credit risk and higher bond yields. Corrupt states can eliminate the corruption yield penalty by purchasing credit enhancements. Underwriting fees were significantly higher during an era when underwriters made political contributions to win underwriting business. This pay-to-play underwriting fee premium exists only for negotiated bid bonds where underwriting business can be allocated on the basis of political favoritism. Overall, our results show a strong impact of corruption and political connections on financial market outcomes.

Keywords: D73; G20; G22; G24; H74

Document Type: Research article

DOI: http://dx.doi.org/10.1093/rfs/hhp010

Publication date: 2009-07-01

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The Review of Financial Studies is a major forum for the promotion and wide dissemination of significant new research in financial economics. As reflected by its broadly based editorial board, the Review balances theoretical and empirical contributions. The primary criteria for publishing a paper are its quality and importance to the field of finance, without undue regard to its technical difficulty. Finance is interpreted broadly to include the interface between finance and economics. The Review is sponsored by The Society for Financial Studies. The editors of the Review and officers of the Society are elected for limited terms.