Article1991

CREDIT RISK, CREDIT RATINGS, AND MUNICIPAL BOND YIELDS: A PANEL STUDY

83 citations0/0 files storedNational Tax Journal

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Credit Risk and Financial Regulations Local Government Finance and Decentralization Fiscal Policies and Political Economy

Abstract

This paper uses a panel data set of general obligation bond issues to examine the channels through which a municipality's credit quality affects its borrowing rate. The paper considers both the direct effect of changes in credit quality on changes in borrowing rates and the indirect effect that operates through changes in credit ratings. Both credit ratings and borrowing rates respond to fiscal indicators in ways that are consistent with the view that credit markets can impose some discipline on municipal fiscal behavior. The estimated effects of rating changes are large in magnitude, but statistically insignificant.

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References

1978Specification Tests in Econometrics 1971The Use of Variance Components Models in Pooling Cross Section and Time Series Data 1988Research in Governmental and Nonprofit Accounting.1983The flypaper effect and other anomalies 1980The Pricing of Options on Debt Securities 1984Interest Yields, Credit Ratings, and Economic Characteristics of State Bonds: An Empirical Analysis: Note 1983The Information Content of Municipal Bond Rating Changes: A Note 1987Estimating the Signaling Benefits of Debt Insurance: The Case of Municipal Bonds

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