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Divided Government, Political Turnover, and State Bond Ratings

Author

Listed:
  • Skip Krueger

    (University of North Texas)

  • Robert W. Walker

    (Washington University in Saint Louis)

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.

Suggested Citation

  • Skip Krueger & Robert W. Walker, 2008. "Divided Government, Political Turnover, and State Bond Ratings," Public Finance Review, , vol. 36(3), pages 259-286, May.
  • Handle: RePEc:sae:pubfin:v:36:y:2008:i:3:p:259-286
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    Citations

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    Cited by:

    1. Sungchan Kim & Soyoung Park, 2016. "Credit Rating Inflation during the 2000s: Lessons from the U.S. State Governments," International Journal of Economics and Financial Issues, Econjournals, vol. 6(1), pages 13-19.
    2. Tima T. Moldogaziev & Tatyana Guzman, 2015. "Economic Crises, Economic Structure, and State Credit Quality Through-the-Cycle," Public Budgeting & Finance, Wiley Blackwell, vol. 35(4), pages 42-67, December.
    3. 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.
    4. Pantzalis, Christos & Park, Jung Chul, 2014. "Too close for comfort? Geographic propinquity to political power and stock returns," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 57-78.

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