Financial Reform and Public Good Provision: : Municipal Bankruptcy Law and the Financing of Hospitals
Authors: 
Stefano Rossi, Hayong YunAuthors Info & Claims
Stefano Rossi, Hayong YunAuthors Info & ClaimsAbstract
Does financial reform improve public good provision? We examine state-level adoption of municipal bankruptcy law. After reform, municipalities’ borrowing costs decrease and bonds’ issuance increase, particularly for bonds financing hospitals; hospitals’ investments increase, particularly when using such bonds; local firms’ investment and performance increase, particularly in the construction sector. Ex ante, reform occurs earlier in states with weaker unions, stronger bondholders’ interests, and better courts. Similar factors explain congressional voting on municipal bankruptcy law. These results support the hypothesis that financial reform destroys labor union rents and expands investment, highlighting a novel spillover channel from public finance to the real economy.
This paper was accepted by Victoria Ivashina, finance.
Funding: This work was supported by the Baffi-CAREFIN Research Center at Bocconi.
Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4800.
References
[1]
Abadie A, Gardeazabal J (2003) The economic costs of conflict: A case study of the Basque Country. Amer. Econom. Rev. 93:112–132.
[2]
Abadie A, Diamond A, Hainmueller J (2010) Synthetic control methods for comparative case studies: Estimating the effect of California’s tobacco control program. J. Amer. Statist. Assoc. 105(490):493–505.
[3]
Abiad A, Mody A (2005) Financial reform: What shakes it? What shapes it? Amer. Econom. Rev. 95(1):66–88.
[4]
Adelino M, Lewellen K, Sundaram A (2015) Investment Decisions of nonprofit firms: Evidence from hospitals. J. Finance 70(4):1583–1628.
[5]
Amdursky RS, Gillette CP, Allen Bass G (2013) Municipal Debt Finance Law: Theory and Practice (Wolters Kluwer, Alphen aan den Rijn, Netherlands).
[6]
Araújo AP, Ferreira D, Funchal B (2012) The Brazilian bankruptcy law experience. J. Corporate Finance 18:994–1004.
[7]
Assunčao J, Benmelech E, Silva FSS (2013) Repossession and democratization of credit. Rev. Financial Stud. 27:2661–2689.
[8]
Ayotte K, Yun H (2009) Matching bankruptcy laws to legal environments. J. Law Econom. Organ. 25:2–30.
[9]
Barro RJ (1974) Are government bonds net wealth? J. Political Econom. 82(6):1095–1117.
[10]
Berglöf E, Rosenthal H (2000) The political economy of American bankruptcy: The evidence from roll call voting, 1800-1978. Accessed May 8, 2023, https://legacy.voteview.com/pdf/Berglof_Rosenthal_Bankruptcy.pdf.
[11]
Biais B, Mariotti T (2009) Credit, wages, and bankruptcy laws. J. Eur. Econom. Assoc. 7:939–973.
[12]
Bolton P, Jeanne O (2007) Structuring and restructuring sovereign debt: The role of a bankruptcy regime. J. Political Econom. 115:901–924.
[13]
Calomiris CW, Larrain M, Liberti J, Sturgess J (2017) How collateral laws shape lending and sectoral activity. J. Financial Econom. 123:163–188.
[14]
Cameron AC, Gelbach JB, Miller DL (2011) Robust inference with multiway clustering. J. Bus. Econom. Statist. 29(2):238–249.
[15]
Campello M, Larrain M (2016) Enlarging the contracting space: Collateral menus, access to credit, and economic activity. Rev. Financial Stud. 29(2):349–383.
[16]
Cavallo E, Galiani S, Noy I, Pantano J (2013) Catastrophic natural disasters and economic growth. Rev. Econom. Statist. 95:1549–1561.
[17]
Cerqueiro G, Ongena S, Roszbach K (2016) Collateralization, bank loan rates and monitoring. J. Finance 71:1295–1322.
[18]
Cestau D, Hollifield B, Li D, Schürhoff N (2019) Municipal bond markets. Annu. Rev. Financial Econom. 11:65–84.
[19]
Chalmers JMR (1998) Default risk cannot explain the muni puzzle: Evidence from municipal bonds that are secured by U.S. treasury obligations. Rev. Financial Stud. 11:281–308.
[20]
Chodorow-Reich G (2019) Geographic cross-sectional fiscal spending multipliers: What have we learned? Amer. Econom. J. Econom. Policy 11:1–34.
[21]
Claessens S, Klapper LF (2005) Bankruptcy around the world: Explanation of its relative use. Amer. Law Econom. Rev. 7:253–283.
[22]
Cohen L, Malloy CJ, Nguyen Q (2016) The impact of forced migration on modern cities: Evidence from 1930s crop failures. Working paper, Harvard University, Cambridge, MA.
[23]
Correia S (2017) Linear models with high-dimensional fixed effects: An efficient and feasible estimator. working paper, Duke University, Durham, NC.
[24]
DeBonis M (2016) House Passes Puerto Rico Rescue Bill Ahead of July Cliff. Washington Post (June 10). Accessed May 8, 2023, https://www.washingtonpost.com/news/powerpost/wp/2016/06/09/puerto-rico-fiscal-rescue-is-poised-to-pass-house-as-july-deadline-looms/.
[25]
Djankov S, Hart OD, McLiesh C, Shleifer A (2008) Debt enforcement around the world. J. Political Econom. 116:1105–1149.
[26]
Dranove D, Garthwaite C, Ody C (2017) How do nonprofits respond to negative wealth shocks? The impact of the 2008 stock market collapse on hospitals. RAND J. Econom. 48:485–525.
[27]
Duggan MG (2000) Hospital ownership and public medical spending. Quart. J. Econom. 115:1343–1373.
[28]
Feldstein SG, Fabozzi FJ (2008) Handbook of Municipal Bonds (John Wiley & Sons, Hoboken, NJ).
[29]
Flachsbart AD (2015) Municipal Bonds in Bankruptcy: § 902(2) and the Proper Scope of “Special Revenues” in Chapter 9. Washington Lee Law Rev. 72(2):955–1032.
[30]
Gao P, Lee C, Murphy D (2019) Municipal borrowing costs and state policies for distress municipalities. J. Financial Econom. 132:404–426.
[31]
Gennaioli N, Rossi S (2010) Judicial discretion in corporate bankruptcy. Rev. Financial Stud. 23:4078–4114.
[32]
Gennaioli N, Rossi S (2013) Contractual resolutions of financial distress. Rev. Financial Stud. 26:602–634.
[33]
Gillette CP (2012) What states can learn from municipal insolvency. Conti-Brown P, Skeet DA Jr, eds. When States Go Broke: The Origins, Context, and Solutions for the American States in Fiscal Crisis (Cambridge University Press, New York), 99–122.
[34]
Green RC (1993) A simple model of the taxable and tax-exempt yield curves. Rev. Financial Stud. 6:233–264.
[35]
Greene WH (2008) Econometric Analysis, 6th ed. (Prentice-Hall, Upper Saddle River, NJ).
[36]
Hackbarth D, Haselmann R, Schoenherr D (2015) Financial distress, stock returns, and the 1978 Bankruptcy Reform Act. Rev. Financial Stud. 28:1810–1847.
[37]
Haselmann R, Pistor K, Vig V (2009) How law affects lending. Rev. Financial Stud. 23(2):549–580.
[38]
Hempel GH (1973) An evaluation of municipal “bankruptcy” laws and procedures. J. Finance 28:1339–1351.
[39]
Kalbfleisch JD, Prentice RL (2002) The Statistical Analysis of Failure Time Data, 2nd ed. (John Wiley and Sons, Hoboken, NJ).
[40]
Kiefer NM (1988) Economic duration data and hazard functions. J. Econom. Literature 26:646–679.
[41]
Kroszner RS, Strahan PE (1999) What drives deregulation? Economics and politics of the relaxation of bank branching restrictions. Quart. J. Econom. 114:1437–1467.
[42]
Krueger AO (2002) A New Approach to Sovereign Debt Restructuring (IMF).
[43]
La Porta R, Lopez-de-Silanes F, Shleifer A (2008) The economic consequences of legal origins. J. Econom. Literature 46:285–332.
[44]
Lehmann HW (1950) The Federal Municipal Bankruptcy Act. J. Finance 5:241–256.
[45]
Liu Y, Rossi S, Yun H (2021) Insurance companies and the propagation of natural disaster shocks to the real economy. Working paper.
[46]
LoPucki LM (2005) Courting Failure: How Competition for Big Cases Is Corrupting the Bankruptcy Courts (University of Michigan Press, Ann Arbor).
[47]
McConnell MW, Picker RC (1993) When cities go broke: A conceptual introduction to municipal bankruptcy. University Chicago Law Rev. 60(2):425–495.
[48]
Mian A, Sufi A (2014) House of Debt (Chicago University Press, Chicago), 1.
[49]
Pagano M, Volpin PF (2005) The political economy of corporate governance. Amer. Econom. Rev. 95:1005–1030.
[50]
Ponticelli J, Alencar LS (2016) Court enforcement, bank loans, and firm investment: Evidence from a bankruptcy reform in Brazil. Quart. J. Econom. 131:1365–1413.
[51]
Poole K, Rosenthal H (2007) Ideology and Congress (Transactions Press, New Brunswick, NJ).
[52]
Poterba JM, Rueben K (1999) State fiscal institutions and the U.S. municipal bond market. Poterba JM, Von Hagen J, eds. Fiscal Institutions and Fiscal Performance (University of Chicago Press, Chicago), 181–207.
[53]
Rajan RG, Zingales L (2003) The great reversals: The politics of financial development in the 20th century. J. Financial Econom. 69:5–50.
[54]
Rodano G, Serrano-Velarde N, Tarantino E (2016) Bankruptcy law and firm financing. J. Financial Econom. 120(2):363–382.
[55]
Scott JA, Smith TC (1986) The effect of the Bankruptcy Reform Act of 1978 on small business loan pricing. J. Financial Econom. 16:119–140.
[56]
Securities Industry and Financial Markets Association (2021) US municipal bonds statistics. Accessed October 4, 2021, https://www.sifma.org/research/statistics.aspx.
[57]
Skeel DA Jr (2013) Is bankruptcy the answer for troubled cities and states. Houston Law Rev. 50:1063–1093.
[58]
Towner M (2020) Debt and bargaining outcomes: Evidence from U.S. hospitals. Management Sci. 66(5):2083–2098.
[59]
Vig V (2013) Access to collateral and corporate debt structure: Evidence from a natural experiment. J. Finance 68:881–928.
[60]
von Lilienfeld-Toal U, Mookherjee D, Visaria S (2012) The distributive impact of reforms in credit enforcement: Evidence from Indian debt recovery tribunals. Econometrica 80:497–558.
[61]
Watson WC, Fillingham A, Henderson GE, Coury MP (2011) Municipal Bankruptcy: A Guide for Public Finance Attorneys (National Association of Bond Lawyers).
[62]
Yang L (2019) Not all state authorizations for municipal bankruptcy are equal: Impact on state borrowing costs. National Tax J. 72(2):435–464.
Recommendations
Mutual Fund Fragility, Dealer Liquidity Provision, and the Pricing of Municipal Bonds
Against the backdrop of COVID-19, we study how the interactions of mutual funds and dealers introduce fragility to the municipal bond market and induce lasting market impacts. During the crisis, trading surges, whereas dealers’ liquidity provision plunges ...
Financial innovation
We propose an ANN/logistic credit risk hybrid model for SME lending.We find that the hybrid model is more accurate than either of the separate ones.Our study is one of few that sheds light on the hybrid model.Our study is one of few which focuses on ...
Financial Regulatory Reform After the Crisis: An Assessment
This is a survey of progress with the postcrisis global G20 reform of the financial system, in five key areas of new regulation: 1 making financial institutions more resilient; 2 ending "too-big-to-fail"; 3 making derivatives markets safer; 4 ...
Comments
Information & Contributors
Information
Published In
Copyright © 2023, INFORMS.
Publisher
INFORMS
Linthicum, MD, United States
Publication History
Published: 01 April 2024
Accepted: 27 July 2022
Received: 23 November 2020
Author Tags
Qualifiers
- Research-article
Contributors
Other Metrics
Bibliometrics & Citations
Bibliometrics
Article Metrics
- 0Total Citations
- 0Total Downloads
- Downloads (Last 12 months)0
- Downloads (Last 6 weeks)0
Reflects downloads up to 18 Jan 2025