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Calling All Issuers: The Market for Debt Monitoring

Author

Listed:
  • Huaizhi Chen
  • Lauren Cohen
  • Weiling Liu

Abstract

95% of long-term municipal bonds have callable features, and yet we find new evidence of a substantial fraction of local governments exercising these valuable options sub-optimally, with significant delays – resulting in sizable losses. Using data from 2001 to 2018, we estimate that U.S. municipals lost over $26 billion from delayed refinancing, whereas the entire U.S. corporate sector, facing the same low interest-rate environment, lost only a comparatively modest $1.4 billion. We present evidence that these delays are related to gaps in localized debt monitoring. For instance, when a bond’s call unlocks in a month that is the fiscal year-end of a local government – a particularly busy time for finance departments – the decision to call is delayed significantly longer. A significantly longer delay also occurs when a municipality is faced with waves of calls all coming due at once. These effects are magnified in smaller municipalities, staffed with smaller finance departments. Moreover, the market for outside monitoring (e.g., underwriters), is a fractured one. It is characterized by extreme stickiness: 87% of a municipality’s bonds are issued with the same underwriter over our sample period. The usage of a less locally-focused underwriter is associated with significantly greater delays.

Suggested Citation

  • Huaizhi Chen & Lauren Cohen & Weiling Liu, 2022. "Calling All Issuers: The Market for Debt Monitoring," NBER Working Papers 29790, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:29790
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    Cited by:

    1. Baridhi Malakar, 2024. "Essays on Responsible and Sustainable Finance," Papers 2406.12995, arXiv.org.

    More about this item

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing

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