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The political affiliation effect on state credit risk

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  • Darío Cestau

    (IE Business School)

Abstract

Past research largely has ignored the effects of political parties on states’ default risks. This paper addresses that question by analyzing the response of credit spreads to weekly polling data from 17 gubernatorial elections between 2009 and 2012, during the 6 months prior to Election Day. The findings are that political affiliation has a significant effect on states’ default risks. The estimated effect of electing a Republican governor is a 6% reduction in the credit spread of the state. The effect prevails regardless of the party in control of the state legislature, and it is larger when gubernatorial elections are contested closely. Set in the context of case law, the paper links higher tax levels to greater credit risk. Moreover, an analysis of the candidates’ campaign promises suggests that stronger positions against tax increases are associated with less default risks. The results of the paper are therefore consistent with the empirical evidence suggesting that Republicans prefer lower taxes.

Suggested Citation

  • Darío Cestau, 2018. "The political affiliation effect on state credit risk," Public Choice, Springer, vol. 175(1), pages 135-154, April.
    • Handle: RePEc:kap:pubcho:v:175:y:2018:i:1:d:10.1007_s11127-018-0519-3
    DOI: 10.1007/s11127-018-0519-3
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    Cited by:

    1. Dario Cestau & Burton Hollifield & Dan Li & Norman Schürhoff, 2019. "Municipal Bond Markets," Annual Review of Financial Economics, Annual Reviews, vol. 11(1), pages 65-84, December.

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    More about this item

    Keywords

    Credit risk; Polls; State elections; Political affiliation; Municipal bonds;
    All these keywords.

    JEL classification:

    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • G1 - Financial Economics - - General Financial Markets

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