Skip to main content
SpringerLink
Log in

Social Capital and the Municipal Bond Market

  • Original Paper
  • Published:
Journal of Business Ethics Aims and scope Submit manuscript

Abstract

We examine the influence of social capital in the municipal bond market. Defined as the norms and networks that encourage cooperation, social capital is a social construct which captures a region’s level of altruism, trustworthiness, and propensity to honor obligations. We expect that municipalities with high social capital are more trustworthy and likely to honor their debt obligations, which will result in lower bond yields. Our findings confirm that the bonds issued by municipalities located in high social capital counties exhibit lower yields compared to the municipalities located in low social capital counties. Our findings are also supported by bond prices in the secondary market, which shows that bonds from the municipalities located in high social capital regions have higher prices. Additional tests reveal that the influence of social capital is stronger for general obligation bonds, suggesting that social capital matters more for bonds where the willingness of municipalities to pay taxes is an important factor. Lastly, we document that the bonds of municipalities in high social capital areas are less likely to have insurance, suggesting that social capital may act as a substitute for bond insurance.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

Notes

  1. The municipal bond market is also important to understand because it represents approximately $3.7 trillion (as of 2010) in outstanding debt. As a source of funding for essential services for state and local governments, the municipal market has grown in size from 185 billion in bond issuances in 1996 to over 433 billion in 2010.

  2. Recent work by Leventis et al. (2015) and Gul and Ng (2016) also finds that religiosity influences audit pricing.

  3. From a high of 57 % insured before the crisis to 19 % in 2008, and to 3.5 % in 2012. http://www.bondbuyer.com/issues/123_83/bond-insurance-then-and-now-revival-of-industry-1062071-1.html.

  4. In additional tests, we also examine the association between social capital and yield spreads and find similar results. Yield spreads are lower for municipal bonds issued in high social capital areas.

  5. Similarly, Jaggi and Tang (2015) also find that distance influences corporate credit ratings and debt costs.

  6. $9.02 billion in monetary defaults in 2014 compared with only $1.95 billion in 2012. http://www.bondbuyer.com/news/markets-buy-side/defaults-reached-record-in-2014-1069491-1.html.

  7. While Moody’s only notes 71 listed defaults from 1970 to 2011, there were 2521 defaults during this same period for unrated municipal securities. http://libertystreeteconomics.newyorkfed.org/2012/08/the-untold-story-of-municipal-bond-defaults.html.

  8. The index consists of 20 general obligation bonds that mature in 20 years. The average rating of the 20 bonds is roughly equivalent to Moody's Aa2 rating. The index represents theoretical yields rather than actual prices or yield quotations. Municipal bond traders are asked to estimate what a current-coupon bond for each issuer in the indexes would yield if the bond was sold at par value. The index is a simple average of the estimated yields of the bonds.

  9. Due to large sample sizes, we find that the Pearson correlations between all variables are significant at the 1 percentile level. We discuss both economic and statistical significance in our multivariate regressions.

  10. http://aese.psu.edu/nercrd/community/social-capital-resources/social-capital-variables-for-1997-2005-and-2009.

  11. Cuny (2016) also indicates that the deterioration in credit quality of the major bond insurers increased demand for voluntary disclosures.

  12. 1−(exp (−0.024*0.322)/exp(−0.024*−0.998)) = 3.12 %.

  13. The difference between the yield to worst for a callable bond and the yield for a noncallable bond is a function of the callable dates and duration. Given that this relationship may not be linear, we examine our results separately for callable and noncallable bonds and find that the association between social capital and bond yields is significant under both samples.

  14. In separate tests, we only include either issue size or bond size and find similar results.

  15. 1−(exp (−0.050*0.322)/exp(−0.050*−0.998)) = 6.39 %.

  16. 1−(exp (−0.026*0.322)/exp(−0.026*−0.998)) = 3.37 %.

  17. The results remain unchanged when the pre-downgrade period and the post-downgrade period are extended to two, three, and four years, respectively. In separate analysis, we also examine the interaction between social capital and the post-downgrade period and find consistent results.

  18. Per the CRSP Treasury database guide, these issues are sorted by term type, which distinguishes the length of maturity. A valid issue that best represents each term is chosen at the end of each month for each of the above referenced fixed terms. A valid issue is one that is at least one half year prior to the target maturity date and is fully taxable. The selection process filters a representative bond from each of the fixed-term groups. The first selection criteria are a noncallable, nonflower bond that is closest to the target maturity of its group and fully taxable. If more than one issue remains, and/or none are available which fit the above criteria, they are then respectively filtered on the basis of flower bonds acceptable at par, and accrued interest if owned by descendent at time of death.

  19. In alternative specifications, we winsorize yield spread at the 1 percent and 99 percent level and find similar results. To address the skewness in distribution, we also examine the log of yield and find similar results.

  20. In additional analysis, we find that social capital is associated with bond yields for general obligation bonds with either a limited or unlimited pledge.

  21. 1−Exp(−0.104) = 0.0988.

  22. 1−Exp(−0.215) = 0.1935.

  23. 1−(exp(−0.032*1.264)/exp(−0.032*−0.446)) = 5.32 %.

  24. We thank the referee for pointing this out and suggesting the use of granger causality tests.

  25. We also examine lags of only 1 year and find similar results.

References

  • Abrigo, M. R., & Love, I. (2015). Estimation of panel vector autoregression in stata: A package of programs. Unpublished working paper, University of Hawaii at Manoa.

  • Alesina, A., & La Ferrara, E. (2000). Participation in heterogeneous communities. The Quarterly Journal of Economics, 115(3), 847–904.

    Article  Google Scholar 

  • Alm, J., & Gomez, J. L. (2008). Social capital and tax morale in Spain. Economic Analysis & Policy, 38(1), 73–87.

    Article  Google Scholar 

  • Anheier, H. K., Gerhards, J., & Romo, F. P. (1995). Forms of capital and social structure in cultural fields: Examining Bourdieu’s social topography. American Journal of Sociology, 100, 859–903.

    Article  Google Scholar 

  • Baber, W. R., & Gore, A. K. (2008). Consequences of GAAP disclosure regulation: Evidence from municipal debt issues. The Accounting Review, 83(3), 565–592.

    Article  Google Scholar 

  • Baber, W. R., Gore, A. K., Rich, K. T., & Zhang, J. X. (2013). Accounting restatements, governance and municipal debt financing. Journal of Accounting and Economics, 56(2), 212–227.

    Article  Google Scholar 

  • Benson, E. D. (1979). The search for information by underwriters and its impact on municipal interest cost. The Journal of Finance, 34(4), 871–885.

    Article  Google Scholar 

  • Benson, E. D., Marks, B. R., & Raman, K. K. (1991). The effect of voluntary GAAP compliance and financial disclosure on governmental borrowing costs. Journal of Accounting, Auditing & Finance, 6(3), 303–319.

    Article  Google Scholar 

  • Bergstresser, D., Cohen, R., & Shenai, S. (2013). Demographic fractionalization and the municipal bond market. Municipal Finance Journal, 34(3), 1–38.

    Google Scholar 

  • Bessembinder, H., Kahle, K. M., Maxwell, W. F., & Xu, D. (2009). Measuring abnormal bond performance. Review of Financial Studies, 22(10), 4219–4258.

    Article  Google Scholar 

  • Blackwell, D. W., & Kidwell, D. S. (1988). An investigation of cost differences between public sales and private placements of debt. Journal of Financial Economics, 22(2), 253–278.

    Article  Google Scholar 

  • Buonanno, P., Montolio, D., & Vanin, P. (2009). Does social capital reduce crime? Journal of Law and Economics, 52(1), 145–170.

    Article  Google Scholar 

  • Butler, A. W. (2008). Distance still matters: Evidence from municipal bond underwriting. Review of Financial Studies, 21(2), 763–784.

    Article  Google Scholar 

  • Butler, A. W., Fauver, L., & Mortal, S. (2009). Corruption, political connections, and municipal finance. Review of Financial Studies, 22(7), 2673–2705.

    Article  Google Scholar 

  • Capeci, J. (1994). Local fiscal policies, default risk, and municipal borrowing costs. Journal of Public Economics, 53(1), 73–89.

    Article  Google Scholar 

  • Cialdini, R. B., Kallgren, C. A., & Reno, R. R. (1991). A focus theory of normative conduct: A theoretical refinement and reevaluation of the role of norms in human behavior. Advances in Experimental Social Psychology, 24(20), 1–243.

    Google Scholar 

  • Coleman, J. S. (1988). Social capital in the creation of human capital. American Journal of Sociology, 94, 95–120.

    Article  Google Scholar 

  • Coleman, J. S. (1990). Foundations of social theory. Cambridge, MA: Belknap Press of Harvard University Press.

    Google Scholar 

  • Cuny, C. (2016). Voluntary disclosure incentives: Evidence from the municipal bond market. Journal of Accounting and Economics, 62(1), 87–102.

    Article  Google Scholar 

  • Deller, S. C., & Deller, M. A. (2010). Rural crime and social capital. Growth and Change, 41(2), 221–275.

    Article  Google Scholar 

  • Downing, C., & Zhang, F. (2004). Trading activity and price volatility in the municipal bond market. The Journal of Finance, 59(2), 899–931.

    Article  Google Scholar 

  • Fukuyama, F. (1995). Social capital and the global economy. Foreign Affairs, 74(5), 89–103.

    Article  Google Scholar 

  • Fukuyama, F. (1997). Social capital and the modern capitalist economy: Creating a high trust workplace. Stern Business Magazine, 4(1), 1–16.

    Google Scholar 

  • Gore, A. K., Sachs, K., & Trzcinka, C. (2004). Financial disclosure and bond insurance. Journal of Law and Economics, 47(1), 275–306.

    Article  Google Scholar 

  • Granger, C. W. J. (1969). Investigating causal relations by econometric models and cross-spectral methods. Econometrica, 37(3), 424–438.

    Article  Google Scholar 

  • Greif, A. (1994). Cultural beliefs and the organization of society: A historical and theoretical reflection on collectivist and individualist societies. Journal of Political Economy, 5(102), 912–950.

    Article  Google Scholar 

  • Guiso, L., Sapienza, P., & Zingales, L. (2004). The role of social capital in financial development. The American Economic Review, 94(3), 526–556.

    Article  Google Scholar 

  • Gul, F. A. & Ng, A. C. (2016). Auditee religiosity, external monitoring, and the pricing of audit services. Journal of Business Ethics (forthcoming).

  • Harris, L. E., & Piwowar, M. S. (2006). Secondary trading costs in the municipal bond market. The Journal of Finance, 61(3), 1361–1397.

    Article  Google Scholar 

  • Hasan, I., Hoi, C. K., Wu, Q., & Zhang, H. (2015). Social capital and debt contracting: Evidence from bank loans and public bonds. Journal of Financial and Quantitative Analysis (forthcoming).

  • Hastie, K. L. (1972). Determinants of municipal bond yields. Journal of Financial and Quantitative Analysis, 7(03), 1729–1748.

    Article  Google Scholar 

  • Hopkins, D. J. (2011). Translating into votes: The electoral impacts of Spanish-language ballots. American Journal of Political Science, 55(4), 814–830.

    Article  Google Scholar 

  • Jaggi, B., & Tang, L. (2015). Geographic location of the firm and credit rating accuracy. Journal of Accounting, Auditing & Finance. doi:10.1177/0148558X15587989.

    Article  Google Scholar 

  • Jha, A. (2013). Financial reports and social capital. Unpublished working paper, Wayne State University.

  • Jha, A., & Chen, Y. (2015). Audit fees and social capital. The Accounting Review, 90(2), 611–639.

    Article  Google Scholar 

  • Jha, A., & Cox, J. (2015). Corporate social responsibility and social capital. Journal of Banking & Finance, 60, 252–270.

    Article  Google Scholar 

  • Jiang, F., Li, C. W., & Qian, Y. (2013). Earthly reward to the religious: Religiosity and the cost of public and private debt. Unpublished working paper, University of Buffalo, New York University and University of Iowa.

  • Johnson, T. M., & Grim, B. J. (2013). Religious diversity. The world’s religions in figures (pp. 93–110). New York: Wiley.

    Google Scholar 

  • Kao, C., & Wu, C. (1994). A re-examination of the impact of credit ratings and economic factors on state bond yields. Review of Quantitative Finance and Accounting, 4(1), 59–78.

    Article  Google Scholar 

  • Kessel, R. (1971). A study of the effects of competition in the tax-exempt bond market. Journal of Political Economy, 79(4), 706–738.

    Article  Google Scholar 

  • Kidwell, D. S., Sorensen, E. H., & Wachowicz, J. M. (1987). Estimating the signaling benefits of debt insurance: The case of municipal bonds. Journal of Financial and Quantitative Analysis, 22(03), 299–313.

    Article  Google Scholar 

  • La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1997). Legal determinants of external finance. Journal of Finance, 52(3), 1131–1150.

    Article  Google Scholar 

  • Leventis, S., Dedoulis, E., & Abdelsalam, O. (2015). The impact of religiosity on audit pricing. Journal of Business Ethics. doi:10.1007/s10551-015-3001-x.

    Article  Google Scholar 

  • Maak, T. (2007). Responsible leadership, stakeholder engagement, and the emergence of social capital. Journal of Business Ethics, 74(4), 329–343.

    Article  Google Scholar 

  • Marlowe, J. (2011). Municipal credit default swaps: Implications for issuers. Municipal Finance Journal, 32(02), 1–28.

    Google Scholar 

  • Marlowe, J. (2013). Municipal bond liquidity before and after the financial crisis. Unpublished working paper, University of Washington.

  • Melé, D. (2003). Organizational humanizing cultures: Do they generate social capital? Journal of Business Ethics, 45(1–2), 3–14.

    Article  Google Scholar 

  • Milgram, S., Bickman, L., & Berkowitz, L. (1969). Note on the drawing power of crowds of different size. Journal of Personality and Social Psychology, 13(2), 79.

    Article  Google Scholar 

  • Nahapiet, J., & Ghoshal, S. (1998). Social capital, intellectual capital, and the organizational advantage. The Academy of Management Review, 23(2), 242–266.

    Article  Google Scholar 

  • Nanda, V., & Singh, R. (2004). Bond insurance: What is special about munis? The Journal of Finance, 59(5), 2253–2280.

    Article  Google Scholar 

  • North, D. C. (1990). Institutions, institutional change and economic performance. Cambridge: Cambridge University Press.

    Book  Google Scholar 

  • Novy-Marx, R., & Rauh, J. (2011a). The crisis in local government pensions in the United States. Growing old: Paying for retirement and institutional money management after the financial crisis, Brookings Institution.

  • Novy-Marx, R., & Rauh, J. (2011b). Public pension promises: How big are they and what are they worth? The Journal of Finance, 66(4), 1211–1249.

    Article  Google Scholar 

  • Park, Y. J., David S. T. M., & Justin M. (2016). Internal control deficiencies and municipal borrowing costs. Public Budgeting & Finance (forthcoming).

  • Pastoriza, D., Ariño, M. A., & Ricart, J. E. (2008). Ethical managerial behaviour as an antecedent of organizational social capital. Journal of Business Ethics, 78(3), 329–341.

    Article  Google Scholar 

  • Portes, A. (1998). Social capital: Its origins and applications in modern sociology. Annual Review of Sociology, 24, 1–24.

    Article  Google Scholar 

  • Putnam, R. D. (1993). The prosperous community. The American Prospect, 4(13), 35–42.

    Google Scholar 

  • Putnam, R. D. (2001). Bowling alone: The collapse and revival of American community. New York: Simon and Schuster.

    Google Scholar 

  • Putnam, R. D. (2007). E pluribus unum: Diversity and community in the twenty-first century the 2006 Johan Skytte Prize Lecture. Scandinavian Political Studies, 30(2), 137–174.

    Article  Google Scholar 

  • Putnam, R. D., Leonardi, R., & Nanetti, R. Y. (1994). Making democracy work: Civic traditions in modern Italy. Princeton: Princeton University Press.

    Google Scholar 

  • Rupasingha, A., & Goetz, S. J. (2008). US county-level social capital data, 1990–2005. University Park: The Northeast Regional Center for Rural Development, Penn State University.

    Google Scholar 

  • Rupasingha, A., Goetz, S. J., & Freshwater, D. (2006). The production of social capital in US counties. The Journal of Socio-Economics, 35(1), 83–101.

    Article  Google Scholar 

  • Schmitt, P. J. (2011). Recent trends in municipal continuing disclosure activities. Tech. Rep., DPC Data.

  • Schultz, P. (2012). The market for new issues of municipal bonds: The roles of transparency and limited access to retail investors. Journal of Financial Economics, 106(3), 492–512.

    Article  Google Scholar 

  • Simonsen, B., & Hill, L. (1998). Municipal bond issuance: Is there evidence of a principal-agent problem? Public Budgeting & Finance, 18(4), 71–100.

    Article  Google Scholar 

  • Simonsen, W., & Robbins, M. D. (1996). Does it make any difference anymore? Competitive versus negotiated municipal bond issuance. Public Administration Review, 56(1), 57–64.

    Article  Google Scholar 

  • Spagnolo, G. (1999). Social relations and cooperation in organizations. Journal of Economic Behavior & Organization, 38, 1–25.

    Article  Google Scholar 

  • Spence, L. J., Schmidpeter, R., & Habisch, A. (2003). Assessing social capital: Small and medium sized enterprises in Germany and the UK. Journal of Business Ethics, 47(1), 17–29.

    Article  Google Scholar 

  • Woolcock, M. (2001). The place of social capital in understanding social and economic outcomes. Canadian Journal of Policy Research, 2(1), 11–17.

    Google Scholar 

Download references

Acknowledgments

We thank Bryan Cloyd, Dov Fischer, Alexander Kogan, Marietta Peytcheva, Bharat Sarath, participants at the 2016 AAA conference, and two anonymous reviewers for helpful comments. We especially thank Wilson Rose for assistance with tax related data from the United States Census and Greg Shailer (editor).

Author information

Authors and Affiliations

  1. School of Accounting, Southwestern University of Finance and Economics, Chengdu, China

    Pei Li

  2. College of Business and Economics, Lehigh University, 621 Taylor Street, Bethlehem, PA, 18015, USA

    Leo Tang

  3. Rutgers Business School, Rutgers, The State University of New Jersey, New Brunswick, NJ, USA

    Bikki Jaggi

Authors
  1. Pei Li
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Leo Tang
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Bikki Jaggi
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Leo Tang.

Appendices

Appendix 1

See Table 15.

Table 15 Variable measurement
Full size table

Appendix 2

See Table 16.

Table 16 Classification of bond ratings
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Li, P., Tang, L. & Jaggi, B. Social Capital and the Municipal Bond Market. J Bus Ethics 153, 479–501 (2018). https://doi.org/10.1007/s10551-016-3355-8

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10551-016-3355-8

Keywords

Search

Navigation