The political affiliation effect on state credit risk
Past research largely has ignored the effects of political parties on states’ default risks. This paper addresses that question by analyzing the response of credit spreads to weekly polling data from 17 gubernatorial elections between 2009 and 2012, during the 6 months prior to Election Day. The findings are that political affiliation has a significant effect on states’ default risks. The estimated effect of electing a Republican governor is a 6% reduction in the credit spread of the state. The effect prevails regardless of the party in control of the state legislature, and it is larger when gubernatorial elections are contested closely. Set in the context of case law, the paper links higher tax levels to greater credit risk. Moreover, an analysis of the candidates’ campaign promises suggests that stronger positions against tax increases are associated with less default risks. The results of the paper are therefore consistent with the empirical evidence suggesting that Republicans prefer lower taxes.
KeywordsCredit risk Polls State elections Political affiliation Municipal bonds
JEL ClassificationH3 H7 G1
This manuscript is the third chapter of my doctoral dissertation at Carnegie Mellon University. I want to thank committee members Dennis Epple, Richard C. Green and Holger Sieg for their help. I would also like to extend special thanks to seminar participants at Carnegie Mellon University, the University of Southern California, Universitat Autònoma de Barcelona, and IE Business School; special thanks to John Matsusaka. Grant number: ECO2014-53022-R: “Incentivos en la retribución de ejecutivos, desvío de fondos y riesgo a corto plazo: el impacto del gobierno corporativo y regulación sobre remuneración”.
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