Local religious beliefs and municipal bond market outcomes

Abstract

This study investigates whether religion-induced risk aversion affects municipal bond market outcomes from 1990 to 2017. The results indicate that local government bonds issued from U.S. counties with a high Catholic-to-Protestant population ratio have lower credit risk ratings and lower yield spreads, and are less likely to have credit enhancement. The results stand up to additional tests. I control for issuer's county political party affiliation and state term limits, and continue to find significant effects. The effects are not driven by the issuer's county fiscal policies. Furthermore, the effects persist when I use an alternate specification that controls for omitted factors that are time invariant. Overall, my evidence suggests that a bond issuer's religion-induced risk aversion plays a significant role in the pricing of local government bonds.

Is There a Racial Bias in Underwriter Fees? Evidence from U.S. County Government Bond Issuance

“…Consequently, the omission of any of them could potentially distort our finding. We find that our result holds after controlling for potential effects arising from local racial diversity (Alesina and La Ferrara, 2000;La Porta, Lopez de Silanes, Shleifer and Vishny, 1999;Easterly and Levine, 1997), local religious belief (Abakah, 2020;Shu, Sulaeman and Yeung, 2012;Kumar, Page and Spalt, 2011), local income inequality and poverty rate (Lichter, Parisi and Taquino, 2012;Lichter, Parisi Taquino and Beaulieu, 2008;Smith and Welch, 1987), local political ideology (Abramowitz and Sanders, 2006;Hutton, Jiang and Kumar, 2015;Kam and Simas, 2010), state corruption (Butler et al, 2009), and local aging population (Butler and Yi, 2019;Maestas, Mullen and Powell, 2017).…”

“…Prior studies find that local racial diversity is negatively related to government quality and economic growth (La Porta et al, 1999;Easterly and Levine, 1997). Further, though the literature documents mixed results, local religious belief affects the risk of municipal debt and corporate risk-taking (Abakah, 2020;Sule, 2012;Kumar et al, 2011). Thus, it is possible that the relationship between county racial composition and underwriting spread could be spurious.…”