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Impact of Corporate Subsidies on Borrowing Costs of Local Governments: Evidence from Municipal Bonds

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  • Sudheer Chava
  • Baridhi Malakar
  • Manpreet Singh

Abstract

We analyze the impact of $40 billion of corporate subsidies given by US local governments on their borrowing costs. We find that winning counties experience a 15.2 basis points (bps) increase in bond yield spread as compared to the losing counties. The increase in yields is higher (18–26 bps) when the subsidy deal is associated with a lower jobs multiplier or when the winning county has a lower debt capacity. However, a high jobs multiplier does not seem to alleviate the debt capacity constraints of local governments. Our results highlight the potential costs of corporate subsidies for local governments.

Suggested Citation

  • Sudheer Chava & Baridhi Malakar & Manpreet Singh, 2024. "Impact of Corporate Subsidies on Borrowing Costs of Local Governments: Evidence from Municipal Bonds," Review of Finance, European Finance Association, vol. 28(1), pages 117-161.
    • Handle: RePEc:oup:revfin:v:28:y:2024:i:1:p:117-161.
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    File URL: http://hdl.handle.net/10.1093/rof/rfad021
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    More about this item

    Keywords

    Corporate subsidies; Municipal debt;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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