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Divided Government, Political Turnover, and State Bond Ratings

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  • Skip Krueger

    (University of North Texas)

  • Robert W. Walker

    (Washington University in Saint Louis)

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    Abstract

    Credit markets face an inherent risk that derives from future policy changes when considering the purchase of debt issued by state governments. An enacting government coalition issuing long-term debt cannot make a credible commitment to maintain the existing debt repayment policy into the future. In the face of this commitment problem, investors (and the rating agencies that serve those investors) look to recent political turnover and the existence of divided government to estimate the possibility that some future government coalition will remain substantially similar to the enacting coalition. Political turnover and divided government suggest to the credit markets that future coalitions may act opportunistically regarding debt repayment. This risk of opportunistic behavior, we argue, manifests in lower ratings of state debt. We empirically examine this claim in a model of state bond ratings from 1995 through 2000.

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    Bibliographic Info

    Article provided by in its journal Public Finance Review.

    Volume (Year): 36 (2008)
    Issue (Month): 3 (May)
    Pages: 259-286

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    Handle: RePEc:sae:pubfin:v:36:y:2008:i:3:p:259-286

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    Related research

    Keywords: bond ratings; divided government; political turnover; state debt; credit markets;

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    Cited by:
    1. Kim, Chansog (Francis) & Pantzalis, Christos & Chul Park, Jung, 2012. "Political geography and stock returns: The value and risk implications of proximity to political power," Journal of Financial Economics, Elsevier, vol. 106(1), pages 196-228.

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