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Claim Dilution in the Municipal Debt Market

Author

Listed:
  • Ivan T. Ivanov
  • Thomas Zimmermann

Abstract

Using loan-level municipal bank lending data, we examine the debt structure of municipalities and its response to exogenous income shocks. We show that small, more indebted, low-income, and medium credit quality counties are particularly reliant on private bank financing. Low income counties are more likely to increase bank debt share after an adverse permanent income shock while high income counties do not shift their debt structure in response. In contrast, only high income counties draw on their credit lines after adverse transitory income shocks. Overall, our paper raises concerns about claim dilution of bondholders and highlights the importance of municipal disclosure of private debt.

Suggested Citation

  • Ivan T. Ivanov & Thomas Zimmermann, 2018. "Claim Dilution in the Municipal Debt Market," Finance and Economics Discussion Series 2018-011, Board of Governors of the Federal Reserve System (US).
  • Handle: RePEc:fip:fedgfe:2018-11
    DOI: 10.17016/FEDS.2018.011
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    File URL: https://www.federalreserve.gov/econres/feds/files/2018011pap.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Bank lending ; Claim dilution ; Disclosure ; Municipal finance;

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G1 - Financial Economics - - General Financial Markets

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