Local religious beliefs and municipal bond market outcomes

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This study investigates whether religion‐induced risk aversion affects municipal bond market outcomes, over the period from 1990 to 2017. The results indicate that local government bonds issued from U.S. counties with high Catholics‐to‐Protestants population ratio have lower credit risk ratings, lower yield spreads, and are less likely to have credit enhancement. The results stand up to additional tests. I control for issuer's county political party affiliation and state term limits and continue to find significant effects. The effects are not driven by the issuer's county fiscal policies. Further, the effects persist when I use an alternate specification that controls for omitted factors that are time‐invariant. Overall, my evidence suggests that bond issuer's religion‐induced risk aversion plays a significant role in the pricing of local government bonds.



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