Political Uncertainty and Public Financing Costs: Evidence from U.s. Municipal Bond Markets
Abstract: This paper investigates the impact of political uncertainty caused by U.S. gubernatorial elections on the borrowing costs of municipal bond issuers in the past twenty years. We nd that the o¤ering yields of municipal bonds issued during election periods are six to eight basis points higher than those of bonds issued during non-election periods. Bonds issued in states with an incumbent governor facing term limits or retirement are associated with o¤ering yields that are higher by an additional three basis points. To provide a scale for these results, the average yield di¤erence between investment-grade and non-investment-grade municipal bonds is six basis points, and the average yield di¤erence between rated bonds and non-rated bonds is 28 basis points. The impact of elections on the borrowing costs of municipal bond issuers is more pronounced during local economic downturns and among states with more outstanding debt. Several state scal and budgetary institutions, such as GAAP-based budgeting, spending limits, and tax-raise limits, mitigate the adverse impact of political uncertainty on the borrowing cost. Evidence from transactions of municipal bonds in the secondary market suggests that declining demand due to investorsuncertainty aversion is the driving force behind the escalated o¤ering yield during election periods. Key Words: Political Uncertainty; Elections
