What Drives Financial Reform? Economics and Politics of the State-Level Adoption of Municipal Bankruptcy Laws
52 Pages Posted: 4 Dec 2015
Date Written: December 2, 2015
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, municipal bonds, judicial efficiency, labor union
JEL Classification: D86, G33, G34, K22
Suggested Citation: Suggested Citation