Do Bondholders Prefer Republican or Democratic Governors?

24 Pages Posted: 11 Jul 2016 Last revised: 15 Dec 2016

See all articles by Dario Cestau

Dario Cestau

IE Business School, IE University

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

Cestau, Dario, Do Bondholders Prefer Republican or Democratic Governors? (July 11, 2016). Available at SSRN: https://ssrn.com/abstract=2807928 or http://dx.doi.org/10.2139/ssrn.2807928

Dario Cestau (Contact Author)

IE Business School, IE University ( email )

Calle Maria de Molina 12, Bajo
Madrid, Madrid 28006
Spain

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