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Public Corruption in the U.S. States and Its Impact on Public Debt Pricing
Author(s) -
Moldogaziev Tima T.,
Liu Cheol,
Luby Martin J.
Publication year - 2017
Publication title -
kyklos
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.766
H-Index - 58
eISSN - 1467-6435
pISSN - 0023-5962
DOI - 10.1111/kykl.12139
Subject(s) - underwriting , debt , language change , issuer , financial system , monetary economics , business , economics , purchasing , finance , art , literature , marketing
Summary This study evaluates the levels of public corruption in the American states and their impact on the prices of public debt sold by underwriting banks to retail investors. Results suggest that the markups paid by retail investors to underwriters decrease significantly with the incidence of public corruption. The relationship remains significant even when existing anti‐corruption enforcement efforts are taken into consideration. Extant literature shows that the issuers of public debt from relatively more corrupt jurisdictions receive lower prices from underwriting banks in wholesale transactions. We develop and empirically show the mechanism through which this can occur. We offer the first evidence that the public debt market exerts disciplining pressures on the American states with greater levels of public corruption. When purchasing state‐issued public debt, retail buyers appear to demand narrower markups by factoring in public corruption. This, we argue, is an important reason why underwriting banks offer lower prices when dealing with less disciplined fiscal sovereigns.