April, 2016

Local Government Type and Municipal Bond Ratings

What's the Relationship?
  • John A. Dove

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Continue reading at SSRN.

There is an extensive literature analyzing the executive branch within local U.S. government jurisdictions. This has largely revolved around the differences between elected mayors and appointed city managers. Much of the academic work has considered the potential efficiency gains that may be associated with either form of government and comparative analyses between the two. However, the empirical literature has been divided regarding the relative efficiency of either form. This paper attempts to add to that literature by considering how bond markets may perceive potential efficiencies that emerge from one executive type over the other by evaluating bond ratings for a sample of large municipal governments in the U.S. Overall, the results suggest that municipalities headed by a city manager are associated with increased bond ratings (and thus lower borrowing costs), which may lend support that this form of administration is, on some margin, relatively more efficient than others. These results are robust to a number of specifications.