Working Paper: CEPR ID: DP10984
Authors: Stefano Rossi; Hayong Yun
Abstract: We investigate economic and political theories of financial reform to analyze state-level adoption of municipal bankruptcy laws (Chapter 9). Using a dynamic Cox hazard model, we find that interest group factors related to the relative strength of potential losers (labor unions) and winners (bond investors), courts? efficiency, and trust in non-opportunistic behavior by local government explain the timing of Chapter 9 adoptions between 1980 and 2012. Similar factors also explain congressional voting on municipal bankruptcy law. After Chapter 9 adoption, municipal bond spreads decrease and firms experience higher revenues, profits, and investments, particularly in states in which more bond proceeds are used by the private sector. Our findings support political and economic theories of financial reform, and highlight a novel spillover channel from the public to the private sector.
Keywords: bankruptcy; chapter 9; judicial efficiency; labor union; municipal bonds
JEL Codes: D86; G33; G34; K22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Stronger labor unions (J59) | Delay in adoption of Chapter 9 (G33) |
| Increased judicial caseload (K40) | Lower likelihood of passing Chapter 9 (G33) |
| Local identity and trust in local government (H73) | Higher likelihood of adoption of Chapter 9 (G33) |
| Larger state debt (H74) | Higher likelihood of adoption of Chapter 9 (G33) |