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Not All State Authorizations for Municipal Bankruptcy Are Equal: Impact on State Borrowing Costs

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  • Lang (Kate) Yang

Abstract

This paper investigates the impact of state authorizations of municipal bankruptcy on state government borrowing costs. The credit markets may perceive bankruptcy authorizations as credit enhancing because states signal no implicit guarantee of local debt. However, the markets may charge a risk premium if authorizations could cause strategic uses of bankruptcy, widespread filings, and contagion. Analyses using 1975–1997 state borrowing-cost estimates show that different authorization regimes have differing effects. Specifically, authorizations conditional on state intervention are associated with a reduction in state borrowing cost. Analyses of a 2010 Rhode Island legislation using state bond data provide similar findings.

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  • Lang (Kate) Yang, 2019. "Not All State Authorizations for Municipal Bankruptcy Are Equal: Impact on State Borrowing Costs," National Tax Journal, National Tax Association;National Tax Journal, vol. 72(2), pages 435-464, June.
    • Handle: RePEc:ntj:journl:v:72:y:2019:i:2:p:435-464
    DOI: 10.17310/ntj.2019.2.05
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    Cited by:

    1. Lang (Kate) Yang, 2022. "Fiscal transparency or fiscal illusion? Housing and credit market responses to fiscal monitoring," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(1), pages 1-29, February.

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