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The Effect of Political Polarization on State Government Bonds

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Title:The Effect of Political Polarization on State Government Bonds
Authors:Li, Pei
Tang, Leo
Cloyd, Bryan
Keywords:Political Polarization
State Bonds
Municipal Debt
Date Issued:28 Aug 2018
Abstract:We examine the effect of political polarization within state legislatures on state bond yields. Defined as the ideological distance between the Democratic and Republican members of the state legislative chambers, political polarization captures the willingness of legislators to seek bipartisan compromises. We expect that states with high polarization are riskier because they are more likely to experience gridlock, which negatively affects economic development and commitment to debt service. We find that the bonds issued by highly polarized states exhibit significantly higher yields at issuance compared to the states with lower levels of political polarization. A one standard deviation increase in polarization increases bond yields by 14.7 basis points and total interest expense by $4.3 million for an average bond issue. Furthermore, we find that the effect of polarization on bond yields is greater for general obligation bonds.
Appears in Collections: 16 Financial: Debt and derivative instruments/Creditor protection/Risk management

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