An Evaluation of Municipal "Bankruptcy" Laws and Procedures

Hempel, George H.

doi:10.2307/2978769

Cited by 13 publications

(8 citation statements)

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“…Trzcinka (1982) cites three reasons why municipal bonds have higher default premiums than corporate debt of the same rating. First, Hempel (1972) argues that municipal assets may be more difficult to seize in bankruptcy. Second, Zimmerman (1977) suggests that information costs are higher for municipal bondholders than for corporate bondholders because municipal financial statements are less informative.…”

Section: Review Of Theory and Evidencementioning

confidence: 99%

Default Risk Cannot Explain the Muni Puzzle: Evidence from Municipal Bonds that are Secured by U.S. Treasury Obligations

Chalmers¹

1998

Rev. Financ. Stud.

110

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Fama (1977) and Miller (1977) predict that one minus the corporate tax rate will equate aftertax yields from comparable taxable and taxexempt bonds. Empirical evidence shows that long-term tax-exempt yields are higher than theory predicts. Two popular explanations for this empirical puzzle are that, relative to taxable bonds, municipal bonds bear more default risk and include costly call options. I study U.S. government secured municipal bond yields which are effectively default-free and noncallable. These municipal yields display the same tendency to be too high. I conclude that differential default risk and call options do not explain the municipal bond puzzle. This article is based on Chapter 1 of my dissertation at the University of Rochester. I thank my dissertation committee, John Long (chairman), Mike Barclay, and Neil Pearson, for their invaluable help and encouragement. I am very grateful to Tom Barone at J. J. Kenny and Co., Inc. for providing the municipal bond data used in this study. I thank Richard Green for providing me with the Salomon yield data.

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Section: Review Of Theory and Evidencementioning

confidence: 99%

Default Risk Cannot Explain the Muni Puzzle: Evidence from Municipal Bonds that are Secured by U.S. Treasury Obligations

Chalmers¹

1998

Rev. Financ. Stud.

110

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“…Chapter 9 of the Bankruptcy Code serves to define what constitutes municipal bankruptcy and sets out the eligibility criteria for distressed municipalities. This part of the legislation is designed to safeguard against municipalities walking away from burdensome debt obligations while, at the same time, ensuring that creditors negotiate in good faith (Hempel ). In recent Chapter 9 filings, the issue of debt obligation has often been concerned with the costs associated with public employee remuneration (Pew ; Trotter ).…”

Section: The Outcomes Of Municipal Bankruptciesmentioning

confidence: 99%

From Big to Small Cities: A Qualitative Analysis of the Causes and Outcomes of Post–Recession Municipal Bankruptcies

Davidson

2020

City & Community

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Two cities loom large in the history of American urban restructuring. New York City's 1975 technical bankruptcy and Detroit's 2013 Chapter 9 bankruptcy have played an oversized role in urban theory. This is currently reflected in competing theories of post‐recession urban restructuring. “Austerity urbanism” uses Detroit as an exemplar, whereas “pragmatic municipalism” adopts the converse position arguing post‐recession reform is defined by local context. This paper draws on the small cities literature to generate a different account of recent municipal bankruptcies and their broader impacts. It uses qualitative methods to survey the causes and outcomes of all eight post‐recession Chapter 9 bankruptcies. The research recognizes the potential nationwide significance of these extreme events but avoids focusing on big city examples. The paper's findings suggest small and medium sized cities play a significant role in shaping recession‐related restructuring.

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“…A number of states explicitly prohibit or do not specifically authorize Chapter 9 filings for their municipalities (see Table ) . Without specific authority to file for Chapter 9 protection, a distressed municipal government would be subject to mandamus action to levy taxes to make payments on existing obligations (Hempel ; Kordana ; McConnell and Picker ). A second group of states conditionally authorizes Chapter 9 filings.…”

Section: Bankruptcy Eligibility Provision As Fiscal Rulementioning

confidence: 99%

Impact of Bankruptcy Eligibility Requirements and Statutory Liens on Borrowing Costs

Moldogaziev¹,

Kioko²,

Hildreth³

2017

Public Budgeting & Finance

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While bankruptcy protection remains an instrument of last resort, a recent wave of petitions has aroused the interest of key participants in the municipal bond market. To date, 12 states unconditionally authorize municipalities to file for bankruptcy protection, 15 states require that municipalities satisfy certain threshold requirements, while the remaining 23 states either explicitly prohibit or have not specifically provided this authority to municipal governments. As bankruptcy protection rules influence bondholder risk exposures, we empirically test the significance of the state‐specific bankruptcy eligibility requirements on borrowing costs. In a representative sample of general obligation bonds, empirical results suggest that municipalities eligible to file for bankruptcy protection pay a premium. The premium is higher if issuers are unconditionally authorized to file for bankruptcy protection, especially for debt with longer maturities. Findings also show that there are benefits associated with statutory liens; however, these benefits diminish with maturity.

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An Evaluation of Municipal "Bankruptcy" Laws and Procedures

Cited by 13 publications

References 0 publications

Default Risk Cannot Explain the Muni Puzzle: Evidence from Municipal Bonds that are Secured by U.S. Treasury Obligations

Default Risk Cannot Explain the Muni Puzzle: Evidence from Municipal Bonds that are Secured by U.S. Treasury Obligations

From Big to Small Cities: A Qualitative Analysis of the Causes and Outcomes of Post–Recession Municipal Bankruptcies

Impact of Bankruptcy Eligibility Requirements and Statutory Liens on Borrowing Costs

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