Do Bondholders Prefer Republican or Democratic Governors?
24 Pages Posted: 11 Jul 2016 Last revised: 15 Dec 2016
Date Written: July 11, 2016
Abstract
Past research has largely ignored the effects that political parties have on states' default risk. This paper addresses this question by analyzing the response of credit spreads to poll data from gubernatorial elections. The findings are that political affiliation has a significant effect on states' credit risk. Between 2009 and 2012, electing Republican governors reduced the default risk regardless of which party controlled the state legislature. I find larger political affiliation effects when gubernatorial elections were closely contested. An analysis of the candidates’ campaign promises suggests that stronger positions against tax increases were associated with lower default risks.
Keywords: State credit risk, opinion polls, gubernatorial elections, political affiliation, municipal bonds
JEL Classification: H3, H7, G1
Suggested Citation: Suggested Citation