DP10984 What Drives Financial Reform? Economics and Politics of the State-Level Adoption of Municipal Bankruptcy Laws

Author(s): Stefano Rossi, Hayong Yun
Publication Date: December 2015
Keyword(s): bankruptcy, Chapter 9, judicial efficiency, labor union, municipal bonds
JEL(s): D86, G33, G34, K22
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10984

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.