Papaer
Fractionalization and the municipal bond market
Daniel Bergstresser*
Randolph Cohen**
Siddharth Shenai***
(First version April 2010. Current draft June 2011. Comments welcome.)
Abstract
We study the impact of ethnic and religious fractionalization on the U.S. municipal debt market, and find that issuers from more ethnically and religiously fractionalized counties pay higher yields on their municipal debt. A two standard deviation increase in religious fractionalization is associated with a six basis point increase in bond yields, and a two standard deviation increase in ethnic fractionalization is associated with a ten basis point increase. To provide a scale for these results, a four-notch rating change, from AAA to AA-, is associated with an eight basis point increase in yields. Additional analysis suggests that at least some of this effect is not driven by the risk of the bonds, but instead reflects inefficiency in the underwriting process.
Keywords: Fractionalization, municipal bonds.
We are grateful for support from Harvard Business School. We are also grateful for comments from Alexander Whalley, Andrei Shleifer, and Alberto Alesina, and from seminar participants at the SEC, HBS, Boston College, USC, and UC-Merced. Finally, we are grateful for excellent research assistance from Mei Zuo. Sid Shenai is at Bracebridge Capital. Daniel Bergstresser and Randolph Cohen have primary academic appointments. Both also engage in consulting and other activities in the investment management industry. Details are available upon request.
* Corresponding author. Harvard Business School. Tel.: 617-495-6169. E-mail: dbergstresser@hbs.edu ** Massachusetts Institute of Technology.
*** Bracebridge Capital.
1
Electronic copy available at: http://ssrn.com/abstract=1844685
A variety of researchers have explored the impact of ethnolinguistic diversity on economic outcomes. Easterly and Levine (1997) propose that ethnolinguistic
Daniel Bergstresser*
Randolph Cohen**
Siddharth Shenai***
(First version April 2010. Current draft June 2011. Comments welcome.)
Abstract
We study the impact of ethnic and religious fractionalization on the U.S. municipal debt market, and find that issuers from more ethnically and religiously fractionalized counties pay higher yields on their municipal debt. A two standard deviation increase in religious fractionalization is associated with a six basis point increase in bond yields, and a two standard deviation increase in ethnic fractionalization is associated with a ten basis point increase. To provide a scale for these results, a four-notch rating change, from AAA to AA-, is associated with an eight basis point increase in yields. Additional analysis suggests that at least some of this effect is not driven by the risk of the bonds, but instead reflects inefficiency in the underwriting process.
Keywords: Fractionalization, municipal bonds.
We are grateful for support from Harvard Business School. We are also grateful for comments from Alexander Whalley, Andrei Shleifer, and Alberto Alesina, and from seminar participants at the SEC, HBS, Boston College, USC, and UC-Merced. Finally, we are grateful for excellent research assistance from Mei Zuo. Sid Shenai is at Bracebridge Capital. Daniel Bergstresser and Randolph Cohen have primary academic appointments. Both also engage in consulting and other activities in the investment management industry. Details are available upon request.
* Corresponding author. Harvard Business School. Tel.: 617-495-6169. E-mail: dbergstresser@hbs.edu ** Massachusetts Institute of Technology.
*** Bracebridge Capital.
1
Electronic copy available at: http://ssrn.com/abstract=1844685
A variety of researchers have explored the impact of ethnolinguistic diversity on economic outcomes. Easterly and Levine (1997) propose that ethnolinguistic
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