Hostname: page-component-78c5997874-t5tsf Total loading time: 0 Render date: 2024-11-09T03:44:46.759Z Has data issue: false hasContentIssue false
  • English
  • Français

The Effect of State Solvency on Bank Values and Credit Supply: Evidence from State Pension Cut Legislation

Published online by Cambridge University Press:  12 July 2018

Lee Jeremy Cohen ,
Marcia Millon Cornett ,
Hamid Mehran  and
Hassan Tehranian
Get access Rights & Permissions [Opens in a new window]

Abstract

We find the financial condition of states impacts bank credit supply through their municipal bond holdings. In particular, we treat sudden political and statutory actions during the 2011 union bargaining rights debates in Wisconsin and Ohio as exogenous shocks to state solvency. We show bank valuations and municipal bond spreads adjust to the announcements, and, over longer horizons, a new lending channel linked to state solvency emerges, whereby banks supply credit as municipal bond appreciations free up capital.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 4 , August 2018 , pp. 1839 - 1870
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

The views expressed are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. The authors thank an anonymous referee, Ozgur Demirtas, Erik Gilje, Stu Gillan, Atul Gupta, Jie (Jack) He, Oguzhan Karakas, Darren Kisgen, Paul Malatesta (the editor), Alan Marcus, Lindsay Mollineaux, Jim Musumeci, Jun Qian, Kristle Romero Cortés, Ronnie Sadka, Phil Strahan, and seminar participants at Boston College, Bentley University, and the Federal Reserve Bank of Atlanta for their helpful comments. An earlier version of this paper has been circulated under the title “The Effect of State Pension Cut Legislation on Bank Values.”

References

Abowd, J. M., and Lemieux, T.. “The Effects of Product Market Competition on Collective Bargaining Agreements: The Case of Foreign Competition in Canada.” Quarterly Journal of Economics, 108 (1993), 983–1014.Google Scholar
Adelino, M., and Ferreira, M. A.. “Bank Ratings and Lending Supply: Evidence from Sovereign Downgrades.” Review of Financial Studies, 29 (2016), 1709–1746.Google Scholar
Akhigbe, A., and Martin, A. D.. “Valuation Impact of Sarbane–Oxley: Evidence from Disclosure and Governance with the Financial Services Industry.” Journal of Banking and Finance, 30 (2006), 989–1006.Google Scholar
Bernile, G.; Kumar, A.; and Sulaeman, J.. “Home Away from Home: Economic Relevance and Local Investors.” Review of Financial Studies, 28 (2015), 2009–2049.Google Scholar
Chava, S., and Purnanandam, A.. “The Effect of Banking Crisis on Bank-Dependent Borrowers.” Journal of Financial Economics, 99 (2011), 116–135.Google Scholar
Cornett, M. M.; Ors, E.; and Tehranian, H.. “Bank Performance around the Introduction of a Section 20 Subsidiary.” Journal of Finance, 57 (2002), 501–522.Google Scholar
Cornett, M. M.; Razaee, Z.; and Tehranian, H.. “An Investigation of Capital Market Reactions to Accounting Rules on Fair Value Accounting.” Journal of Accounting and Economics, 22 (1996), 119–154.Google Scholar
Dimson, E.“Risk Measurement When Shares Are Subject to Infrequent Trading.” Journal of Financial Economics, 6 (1979), 197–226.Google Scholar
Fama, E., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.Google Scholar
Schnabl, P.“The International Transmission of Bank Liquidity Shocks: Evidence from an Emerging Market.” Journal of Finance, 67 (2012), 897–932.Google Scholar