Current Research
Working Papers
Working Papers
Do Anti-ESG Policies Hurt Local Governments?
Evidence from the Municipal Bond Market
(with Christian Lundblad, Christos Makridis, and Giang Nguyen)
Abstract
Several states, such as Texas and Oklahoma, recently enacted legislation to boycott financial institutions with strong ESG stances, including those playing a major role in underwriting municipal bonds. Using data from 2007 to 2024, we examine the effects of states’ anti-ESG policies on municipal finance outcomes. Exploiting within-state variation and leveraging coarsened exact matching, we find no significant evidence that these policies increased bond markups or materially affected yields. Our findings challenge the view that anti-ESG policies necessarily translate into higher borrowing costs for municipal issuers or transaction costs for investors. We contribute to the debate by highlighting the need to consider the effects of states’ anti-ESG laws in the broader empirical and historical context given market adaptation and issuer heterogeneity.
Evidence from the Municipal Bond Market
(with Christian Lundblad, Christos Makridis, and Giang Nguyen)
Abstract
Several states, such as Texas and Oklahoma, recently enacted legislation to boycott financial institutions with strong ESG stances, including those playing a major role in underwriting municipal bonds. Using data from 2007 to 2024, we examine the effects of states’ anti-ESG policies on municipal finance outcomes. Exploiting within-state variation and leveraging coarsened exact matching, we find no significant evidence that these policies increased bond markups or materially affected yields. Our findings challenge the view that anti-ESG policies necessarily translate into higher borrowing costs for municipal issuers or transaction costs for investors. We contribute to the debate by highlighting the need to consider the effects of states’ anti-ESG laws in the broader empirical and historical context given market adaptation and issuer heterogeneity.
Public Expenditures and Racial Disparities: Real Effects of State Municipal Restructuring Policies
(with Audra Boone and Xin Fan)
Draft from May 2025
(with Audra Boone and Xin Fan)
Draft from May 2025
Abstract
We find that higher creditor recovery rates in states that mandate political intervention (Proactive) versus those that allow unconditional access to judicial bankruptcy (Chapter 9) impose significant economic costs on distressed local communities. Municipalities in Chapter 9 states have higher post-default public expenditures and public employment than communities in Proactive states. These differences are larger for municipalities with a higher proportion of minority populations, and this effect is magnified in locations where there is high racial bias. When municipalities vote for the same party as the governor, the negative consequences associated with default in Proactive states are mitigated.
We find that higher creditor recovery rates in states that mandate political intervention (Proactive) versus those that allow unconditional access to judicial bankruptcy (Chapter 9) impose significant economic costs on distressed local communities. Municipalities in Chapter 9 states have higher post-default public expenditures and public employment than communities in Proactive states. These differences are larger for municipalities with a higher proportion of minority populations, and this effect is magnified in locations where there is high racial bias. When municipalities vote for the same party as the governor, the negative consequences associated with default in Proactive states are mitigated.
The Price of Safety: The Evolution of Municipal Bond Insurance Value
(with Kimberly Cornaggia and Giang Nguyen)
Accepted October 2022 at Management Science
Draft left available here until in press
October 27, 2022 Draft
Hutchins Center at Brookings Institute Working Paper
Bloomberg article: "Cities are Buying Bond Insurance That May Be Giving Them Nothing"
by Martin Braun
Abstract
We examine the benefits of bond insurance to taxpayers using comprehensive data over three decades. We employ multiple modelling approaches to account for the selection into insurance parametrically and non-parametrically. Controlling for fundamentals and the choice to insure, insurers with Aaa credit ratings provided valuable coverage in gross terms, on average, prior to 2008. After 2008, insurers were downgraded and municipalities systematically upgraded, shrinking their difference in ratings-based credit quality and thus diminishing the value of credit enhancement. However, average values belie significant heterogeneity. We find no evidence that insurance provided significant value, even in gross terms, to the highest-rated issuers even before 2008. In contrast, we find significant insurance value among lower-rated issuers over the entire period. We conclude that higher-rated communities historically subsidized those with weaker ratings. Cross-sectional results suggest that agency problems and conflicts of interest help explain this over-insurance phenomenon.
(with Kimberly Cornaggia and Giang Nguyen)
Accepted October 2022 at Management Science
Draft left available here until in press
October 27, 2022 Draft
Hutchins Center at Brookings Institute Working Paper
Bloomberg article: "Cities are Buying Bond Insurance That May Be Giving Them Nothing"
by Martin Braun
Abstract
We examine the benefits of bond insurance to taxpayers using comprehensive data over three decades. We employ multiple modelling approaches to account for the selection into insurance parametrically and non-parametrically. Controlling for fundamentals and the choice to insure, insurers with Aaa credit ratings provided valuable coverage in gross terms, on average, prior to 2008. After 2008, insurers were downgraded and municipalities systematically upgraded, shrinking their difference in ratings-based credit quality and thus diminishing the value of credit enhancement. However, average values belie significant heterogeneity. We find no evidence that insurance provided significant value, even in gross terms, to the highest-rated issuers even before 2008. In contrast, we find significant insurance value among lower-rated issuers over the entire period. We conclude that higher-rated communities historically subsidized those with weaker ratings. Cross-sectional results suggest that agency problems and conflicts of interest help explain this over-insurance phenomenon.
The Rise of Investor Sophistication and the Decline of Underwriting Profits in the Municipal Bond Market
(with Christian Lundblad, Christos Makridis, and Giang Nguyen)December 9, 2024 Draft
Bloomberg Article: Citigroup, UBS Exit Munis After Market's Profits Plummet by 50%
by Shruti Singh and Skylar Woodhouse
Abstract
Recent exits of several major underwriters from the municipal bond market raise important questions about the future of municipal finance and motivate our in-depth analysis of underwriting profitability across different underwriter types and over time. Using comprehensive data on all trades, all bonds, and all underwriting spreads available between 2005 and 2023 and a structural model with latent investor type, we uncover several key results. First, underwriters are half as likely over the time span of our sample to encounter an uninformed retail investor when selling an issue. Moreover, the markups they can charge these dwindling investors have fallen by a third. Increased transparency has significantly reduced search costs for retail investors served by national underwriters, explaining the documented increase in investor sophistication and the declining profitability of uninformed trades. Furthermore, underwriting spreads are not sufficiently rising enough to offset the declining profits from markups on uninformed trades. Last, if the goal is to characterize each investor type's differential level of information, we show that the $100,000 trade size cutoff commonly used in the literature to classify retail versus institutional trades is not appropriate.
Bloomberg Article: Citigroup, UBS Exit Munis After Market's Profits Plummet by 50%
by Shruti Singh and Skylar Woodhouse
Abstract
Recent exits of several major underwriters from the municipal bond market raise important questions about the future of municipal finance and motivate our in-depth analysis of underwriting profitability across different underwriter types and over time. Using comprehensive data on all trades, all bonds, and all underwriting spreads available between 2005 and 2023 and a structural model with latent investor type, we uncover several key results. First, underwriters are half as likely over the time span of our sample to encounter an uninformed retail investor when selling an issue. Moreover, the markups they can charge these dwindling investors have fallen by a third. Increased transparency has significantly reduced search costs for retail investors served by national underwriters, explaining the documented increase in investor sophistication and the declining profitability of uninformed trades. Furthermore, underwriting spreads are not sufficiently rising enough to offset the declining profits from markups on uninformed trades. Last, if the goal is to characterize each investor type's differential level of information, we show that the $100,000 trade size cutoff commonly used in the literature to classify retail versus institutional trades is not appropriate.
Spillover Effects of Opioid Abuse on Skilled Human Capital and Innovation Activity
(with Kimberly Cornaggia, Kevin Pisciotta, and Zihan Ye)
September 27, 2023 Draft
Accepted Management Science, April 2025
Draft left here until in press
Abstract
We document spillover effects of the opioid epidemic on the migration and output of skilled
workers who drive corporate innovation. Exploiting geographic variation in opioid abuse unrelated
to economic conditions, we document outmigration of inventors and research labs from
affected areas. This dislocation is accompanied by declines in the quantity and value of patent
filings, new business formation, venture capital investment, and entrepreneurial activity. We
further document persistent long-term changes in local economic vibrancy. Because the displaced
workers are unlikely to abuse opioids, we interpret our results as spillover effects of
opioid abuse on non-users.
(with Kimberly Cornaggia, Kevin Pisciotta, and Zihan Ye)
September 27, 2023 Draft
Accepted Management Science, April 2025
Draft left here until in press
Abstract
We document spillover effects of the opioid epidemic on the migration and output of skilled
workers who drive corporate innovation. Exploiting geographic variation in opioid abuse unrelated
to economic conditions, we document outmigration of inventors and research labs from
affected areas. This dislocation is accompanied by declines in the quantity and value of patent
filings, new business formation, venture capital investment, and entrepreneurial activity. We
further document persistent long-term changes in local economic vibrancy. Because the displaced
workers are unlikely to abuse opioids, we interpret our results as spillover effects of
opioid abuse on non-users.