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Bond pricing in the biggest city bankruptcy in history: The effects of state emergency management laws on default risk

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  • Murphy, Austin

Abstract

This study investigates the returns to bondholders around important events in the Detroit bankruptcy that impacted market expectations of recoveries on the City’s debt. It illustrates how stricter State interference in the financial affairs of a distressed local government can increase the likely payoff to that entity’s own creditors. However, such interventions are also shown to potentially raise the default risk of economically related municipalities. Further investigations indicated that increases in Michigan’s emergency management powers did not positively impact the returns on a broad sample of distressed municipal bonds in Michigan nor improve the overall credit quality of the State and its political subdivisions.

Suggested Citation

  • Murphy, Austin, 2018. "Bond pricing in the biggest city bankruptcy in history: The effects of state emergency management laws on default risk," International Review of Law and Economics, Elsevier, vol. 54(C), pages 106-117.
    • Handle: RePEc:eee:irlaec:v:54:y:2018:i:c:p:106-117
    DOI: 10.1016/j.irle.2017.12.001
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    References listed on IDEAS

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    1. Amy B. Monahan, 2010. "Public Pension Plan Reform: The Legal Framework," Education Finance and Policy, MIT Press, vol. 5(4), pages 617-646, October.
    2. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
    3. Michael Schwert, 2017. "Municipal Bond Liquidity and Default Risk," Journal of Finance, American Finance Association, vol. 72(4), pages 1683-1722, August.
    4. Vikram Nanda & Rajdeep Singh, 2004. "Bond Insurance: What Is Special About Munis?," Journal of Finance, American Finance Association, vol. 59(5), pages 2253-2280, October.
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    Cited by:

    1. John Murphy, 2021. "Economics-2020. What Happens When Everything Shuts Down Except the “Money Printing Pressesâ€," Economic Alternatives, University of National and World Economy, Sofia, Bulgaria, issue 1, pages 91-112, March.
    2. Na Ta & Bo Gao, 2022. "RETRACTED ARTICLE: Applying blockchain technology in the corporate bond model for default risk assessment under the marketization principle," Operations Management Research, Springer, vol. 15(3), pages 879-890, December.

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    More about this item

    Keywords

    Emergency management; Bankruptcy municipal finance; Bond pricing;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management

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