Corruption, Political Connections, and Municipal Finance

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

doi:10.1093/rfs/hhp010

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Corruption, Political Connections, and Municipal Finance

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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.

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Corruption, Political Connections, and Municipal Finance

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