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Religious Beliefs, Political Ideology and Municipal Finance

Alex Abakah Simi Kedia1

First Draft: March 2015 Preliminary: Please do not cite

Abstract

Previous studies have shown that social norms or culture proxies, such as religious beliefs and political ideology influence individual, and corporate decision making. Catholics are more tolerant of gambling and are associated with higher risk taking. The political ideology of the Republicans is associated with conservative policies and potentially less risky choices. We examine the religious beliefs and political ideology of the state residents to examine their effects the bond rating and cost of issuing municipal debt. Using a sample of new municipal bond issues over the period 1990 to 2010, we find that states with a lower fraction of Catholics and a higher fraction of republicans have better bond ratings, lower initial bond yields and a lower gross spread. We find weak evidence that the State Governor’s religious beliefs and political ideology also has some impact on municipal finance.

1 Both authors are at Rutgers Business School and can be reached at [email protected] and [email protected] respectively. We thank the Whitcomb Center for financial assistance. All errors are our responsibility.

1 2 1 Introduction

Recently, the public has given a great deal of attention to public debt. This is not surprising giving the enormous size of the current municipal bond market. According to the Securities and Exchange Commission, there was less than $20 billion of municipal debt outstanding in 1945. The total municipal debt outstanding increased to $361 billion in 1981. In 2014, investors held roughly $3.7 trillion of municipal debt. The enormous increase in municipal market size since 1945 makes the cost of municipal debt a crucial subject or area that needs public attention.

Specifically, state governors, county officials, city managers/mayors, town officials, and other local officials have become increasingly worried about municipal bond ratings and public cost of capital associated with the bonds they issue to raise capital to undertake various needed projects in their locality. Much has been done at the macroeconomic-level studies of the determinants of credit risk (Depken and LaFountain, 2006; Butters, Depken and LaFountain, 2006; Butler and Fauver 2006), and also at the social science level studies in understanding the impact of political uncertainty on asset prices (Pastor and Veronesi, 2011; 2012). In this paper, we use local culture to examine whether its help explain municipal bond rating, and cost of public debt.

The classical economist, Adam Smith (1790) argues that culture is important in understanding economic outcomes. There is a clear evidence of cultural based explanations to important economic questions and that the crucial influence of culture in economic activities cannot be ignored (Guiso, Sapienza and Zingales, 2006). Following Guiso, Sapienza and Zingales (2006) definition of culture, we focus on two kinds of culture namely, religion (specifically, Catholic faith), and politics (Republican ideology). We then examine their effects on municipal bond yields, and bond ratings.

It has been documented in finance literature that religion helps explain financial outcomes. For example, it has been documented that firms headquartered in locations with strong religious social norms tend to have fewer financial reporting irregularities (McGuire, Omer and Sharp, 2012). Kumar, Page and Spalt (2011) document that religion-induced gambling attitudes (higher Catholic-Protestant population ratio) have effect on investor’s portfolio choices, corporate decisions, and stock returns.

3 Catholics appear to be more tolerant of taking on hypothetical gamble, and this may be due to their religious teachings regarding gambling (Halek and Eisenhaur, 2001).

With respect to Republican ideology, Hutton, Jiang and Kumar (2014) show that managers’ conservatism affect their corporate level decision making. Conservative individuals fear losses and value financial security (Jost, Glaser, Kruglanski and Sulloway, 2003).

First, we begin the empirical investigation by examining whether states with higher proportion of Catholic population have higher municipal bond yields, and higher bond ratings. We find evidence that suggests that municipal bonds issued from states with higher proportion of Catholic population (Catholic faith) tend to have higher yields after controlling for bond level characteristics, state-level macroeconomic variables, and state-level demographic variables. The positive relation between Catholic faith, and bond yield is statistically significant at 5% level.

Next, we ask whether the state governor’s religious belief (Catholic governor) matters in municipal finance. We run a separate regression to examine the marginal effect of Catholic governor on municipal finance, and find that bonds issued from states that have Catholic governor tend to have higher municipal bond yields, and that this effect is statistically significant at 5% level. In addition, we document that Catholic faith, and Catholic governor have independent marginal significant effects on yield when we include both variables in the same regression.

With respect to municipal bond ratings, our empirical findings show that bond issued from states with higher Catholic population have lower quality ratings, and this effect is statistically significant at 5% level. In contrast, there is no evidence to suggest that Catholic governor has any significant effects on municipal bond ratings.

Furthermore, we ask whether state residents’ conservatism as measured by political ideology or party affiliation (i.e. Republican ideology) matters in municipal finance. We also ask whether state governor’s conservatism has any effects on municipal bond yields, and bond ratings. We find that Republican ideology is negatively related to municipal bond yields, and bond ratings. These results suggest that, all things being equal, states that are predominantly Republican (states that vote for Republican Party) have lower bond yields, and

4 higher quality bond ratings. In contrast, we find that bonds issued from state that have Republican governor tends to have higher yields, and higher quality ratings.

Since, the positive effect of Republican governor on yield contradicts Republican governor’s conservatism theory, we examine possible channels through which we observe the positive relation between Republican governor, and bond yields. One potential channel is when a state governor is both a Republican and a Catholic (we called this interaction term, Republican governor x Catholic governor). We run a regression test which includes Republican governor, Catholic governor, and the interaction term. We find that the inclusion of Catholic governor, and the interaction term in the regression that has Republican governor dummy variable weakens the positive effect Republican governor has on municipal yields, suggesting that Republican governor (independently) is not positively significant in explaining municipal bond yields.

Another possible channel we consider is a Republican governor serving in predominantly Democratic state (least Republican state). We construct the interaction dummy, (i.e. Low Republican ideology x Republican governor), and include it in a regression model along with Republican governor dummy, and a dummy for the bottom 25 percentile Republican states. We find evidence that, indeed, the coefficient of Republican governor is positively and significantly related to municipal bond yield in least Republican states. That is, the interaction term is positively related to bond yield. In contrast, we document that Republican governor independently does not have significant positive effect on municipal bond yield after we control for the interaction effect.

The third channel we examine is Republican governor serving in a state with higher Catholic population. Our empirical findings indicate that for bonds issued from a Catholic dominated state, the Republican governor appears to have no marginal effects on municipal bond yields after we control for the interaction effect between Republican governor, and Catholic dominated state (top 25 percentile Catholic states).

Finally, we find that Catholic faith, and Catholic governor are positively related to gross spread. Their coefficients are positive, and statistically significant at 1% level. In contrast, Republican ideology, and Republican governor are negatively associated with gross

5 spread. The coefficient of Republican ideology is negative and statistically significant at 1%, but that of Republican governor is not statistically significant.

The rest of the paper is structured as follows. Section 2 reviews the previous literature and presents our hypotheses. Section 3 presents an overview of municipal bond market. Section 4 describes the data sample and data sources, explain the construction of the variables used, and presents summary statistics. Section 5 presents the empirical results. Section 6 concludes the paper.

2 Literature review and Hypothesis Development 2.1 Local religious beliefs and risk-taking behaviors

Though most religions’ philosophies have common elements to their teachings, there are some distinct differences in their core beliefs and values that have implications for their risk taking behaviors. Weber (1905) and Harrison (1985) argue that there are differences between Protestants and Catholics with respect to their risk taking behavior. Specifically, it is with respect to speculative risk that there is a difference between Catholics and Protestants.2 A number of survey and empirical studies also document consistent evidence of diverging attitudes toward speculative risk across religious beliefs. Halek and Eisenhauer (2001) find that Catholics appear to be more tolerant of taking on hypothetical gamble. They speculate that their finding may be due to the differences in religious teachings regarding gambling – Protestant denominations generally view gambling as sinful, whereas, Catholics generally tolerate gambling. Hoffmann (2000) notes that the Catholic Church has often been criticized by other religious groups for promoting gambling through bingo and other charitable gaming events. Benjamin, Choi and Fisher (2010) document that Protestants are relatively more risk averse than Catholics. Earlier studies find strong evidence that Catholics tend to have a lower aversion to speculative risk than the average population while Protestants have a relatively higher aversion to speculative risk. Stulz and Williamson (2003) find that creditor rights are stronger in countries where the main religion is Protestant rather than Catholic regardless of legal origin.

2 There are two types of risk – pure and speculative. Pure risks are a family of risks in which all possible outcomes are harmful in some way. Thus, a pure risk is a situation that can only end in a loss. For example, the risk of a car accident. On the other hand, speculative risks are a family of risks in which some possible outcomes are beneficial leading to a possibility of gain. Examples of speculative risk are stock investment or casino gambling.

6 They also document that Protestant countries have better enforcement of rights than do Catholic countries.

More recently Kumar, Page and Spalt (2011) also argue for higher risk taking among Catholics. Kumar, Page and Spalt (2011) document higher risk taking among catholic fund managers and the greater use of broad based option plans in regions with a higher proportion of Catholics. Similar arguments are also found in Halek and Eisenhauer (2001). Recent studies have also shown the effect of religious beliefs at the macroeconomic level. Guiso, Sapeinza and Zingales (2003) find that stronger religious beliefs are associated with less rent seeking and a higher rate of economic growth. Barro and McCleary (2003) find that macroeconomic development has a negative correlation with church attendance.

If Catholic faith is more tolerant of risk taking, the regions with a higher fraction of Catholic population are likely to elect members of school district board of education, county/state officials and members of local and state government that also favor similar risk taking activities. They are also more likely to support and vote for projects that have gambling like payoffs. Thus in such regions public projects are likely to be riskier. As these public projects are financed with municipal bonds, the bond markets anticipate this greater risk taking associated with higher fraction of Catholics. This leads to our first hypothesis

H1: Municipal Bonds from states with Catholic beliefs should have a worse credit rating and higher initial bond yields.

The elected officials who make investment decisions for the county/ state are likely to reflect the preferences of the residents. Our first proxy for the influence of Catholic beliefs on municipal finance is the fraction of the state population that is Catholic, referred to as Catholic Faith. We also attempt to capture the religious beliefs of the officials by those of the Governor. We create a dummy variable, referred to as Catholic Governor that is equal to one if the governor is Catholic. The first hypothesis then implies that Catholic Faith and Catholic Governor are associated with significantly worse credit ratings and higher bond yields.

2.2 Political ideology and financial conservatism

7 Next, we examine the ideology of conservatism and its bearing on risk taking by municipalities. Wilson (1973) argues that individuals with a conservative ideology are rooted in a generalized intolerance of uncertainty, and are more sensitive to the possibility of a loss. Uncertainty refers to all situations that involve innovation, novelty, anomie, ambiguity, complexity, and risk. Support for this is provided by Glasgow and Cartier (1985) who document that conservative people prefer familiar pieces of music over unknown pieces of music; Gillies and Campbell ( 1985) who find that conservatives prefer simple over complex poems; Wilson, Ausmen and Mathews, 1973 who document that conservatives prefer representational over abstract paintings; McAllister and Anderson (1991) who show that they prefer plausible over implausible texts and Atief, Brief and Vollrath (1987) who find that they assign more importance to job security and less importance to variety work. Jost, Glaser, Kruglanski and Sulloway, (2003) show that conservative individuals fear losses and value financial security.

Abramowitz and Saunders (2008) find that there are large differences in outlook between Democrats and Republicans that reflects differences in conservative ideology. They argue that people with conservative views tend to favor the core values of the Republican Party. In a survey covering the period from 1960 to 2008 conducted by the American National Election studies, about 44-68% of those surveyed held the belief that Republicans are more conservative than Democrats whereas 9-18% held the belief that Democrats are more conservative relative to Republicans. A recent survey conducted by Gallup (2014 survey) found that 70% of Republicans identify themselves as conservative, 24% of Republicans identify themselves as moderate, and only 6% see themselves as liberal. The same Gallup survey reports that 19% of Democrats identify themselves as conservative, 36% of Democrats identify themselves as moderate, and 45% of Democrats identify themselves as liberal.

In line with this argument, Hutton, Jiang and Kumar (2014) document that firms with republican managers are associated with conservative corporate policies that involve lower levels of corporate debt, lower capital and R&D expenditures, less risky investments, and higher profitability. This leads to our second hypothesis

H2: Municipal Bonds from states with a Republican ideology should have better credit rating and lower initial bond yields.

8 As in the prior section, our first proxy for Republican ideology is the fraction of the state that is Republican. The second proxy for Republican Ideology is the political affiliation of the Governor.

3 Overview of Municipal bond market Municipal bonds are securities that are issued for the purpose of financing the infrastructure needs of the issuing municipality. These needs very greatly but can include schools, streets and highways, bridges, hospitals, public housing, sewer, water systems, power utilities, and various public projects. Municipal securities consists of both short-term notes and long-term bonds. For the purpose of this study, we focus on bonds.

Potential issuers of municipal bonds include states, cities, counties, redevelopment agencies, special-purpose districts, school districts, public utility districts, publicly owned airports and seaports, and any other government entity at or below the state level. Buyers of municipal bonds include individuals, commercial banks, property and casualty insurance companies, and mutual and money market funds. Outstanding state and local debt obligations total approximately 3.7 trillion dollars as of 2014. Municipal bonds are different from corporate bonds in several ways; (1) in the case municipal bonds, a state or local government or local agency/authority, not a corporation, is the issuer; (2) in the municipal bond market, market participants access to current financial information about issuers may be limited, difficult to find, or unavailable whereas that of corporate bond issuers is easier to access (3) municipal bonds provide tax exemptions from federal taxes and many state and local taxes, depending on the laws of each state whereas the income generated by corporate bonds are not. Because municipal bonds are generally free from federal income taxes, they are referred to as “tax exempt bonds”.

Generally, every state has statues that require “open meetings” or other disclosure of the terms of municipal bond offerings. Despites its size, and its economic significance, the municipal bond market still lacks many of the protections customary in many other sectors of the

9 U.S. capital market. The Securities and Exchange Commission (SEC) has little authority to regulate municipal issuers (Beckett 1997).

The two most common types of municipal bonds are general obligation bonds and revenue bonds. In the case of general obligation bonds, principle and interest payments are secured by the full faith and credit of the issuer and usually supported by either the issuer’s unlimited or limited taxing power. In many cases, general obligation bonds are also voter- approved. More often than not, there is a limit set on the amount of general obligation bond indebtedness an entity can issue at any one time. For revenue bonds, however, the principal and interest payments are secured by revenue derived from tolls, charges or rents from the facility built with the proceeds of the bond issue. As revenue bonds do not carry the same guarantee as general obligation bonds do and as their repayment is dependent upon the success or failure of the project they support, they are riskier than general obligation bonds and have higher yields.

When a state or local government decides to finance a capital project by issuing bonds it hires an underwriter through a competitive bid or a negotiated contract. In a negotiated contract, the issuer issues a Request for Proposal and potential underwriters submit written proposals. The underwriter is chosen based on these proposals or after further presentations and question answer sessions. In negotiated contracts, the terms of the bonds are generally tailored to meet the demands of the underwriter’s investor clients, as well as the needs of the issuer. In competitive bid, bonds are advertised for sale and include both the terms of the sale and the terms of the bond issue. Potential underwriters submit a sealed bid for purchasing the bonds with the winning bidder being the lowest bid received.

Underwriting of municipal bonds has not been without controversies. More recently (in 2013), L.J. Hart & Co., a St. Louis, Missouri based municipal bond underwriter agreed to pay a $200,000 fine to settle charges that it violated pay-to-play rules by giving tickets to sporting events to win work from schools and counties. The term ‘pay-to-play” is a situation whereby investment banks or their employees make campaign contribution to politicians or candidates for office in the hope that the investment bank will be selected as the underwriter for municipal bond issue(s). In 1994, SEC enacted rules to eliminate pay-to-play in the municipal bond underwriting business. The pay-to-play rule, MBRB Rule G-37, prohibits investment banks from underwriting municipal bonds for an issuer for two years after the investment bank or its

10 employees make a campaign contribution to an elected official of that municipality. After SEC established the above rule, it appears that pay-to-play is no longer a major concern in the municipal bond underwriting business.

4 Data and summary statistics

The main variables of interest in this paper are: residents’ religious belief (Catholic faith), religious belief of the governor (Catholic governor), residents’ political ideology (Republican ideology), and governor’s political ideology (Republican governor). Here, we define and discuss how we obtain our data for the main variables and other controlled variables, and present summary statistics. All the variables are winsorized at the 1st and 99th percentiles.

4.1 Bond characteristics, and other variables

The data on municipal bonds is from the Securities Data Company’s (SDC Platinum) Global Public Finance database. We collect data on all new U.S. issues from 1990 through 2010. We collect data on various bond characteristics for tax-exempt municipal bonds, such as yield to maturity, underwriter’s gross spread, issue size, bond rating, issue date, bond type (revenue or Go bond), bid type (competitive or negotiated bid), underwriter information (lead underwriter name, and whether lead underwriter is a minority owned company), information on credit enhancement, issuer state, and years to maturity. The initial data consist of 302,765 new municipal bond issues. We exclude bond issues with a maturity of less than a year resulting in a sample of 258,525 bonds.

As seen in Table 1, the average bond issue has a maturity of approximately 17 years and raises about $23 million. The bond ratings are numerical values of S&P ratings.3 We use

3 We use S&P ratings as Butler (2008) argues that Moody ratings are more likely to unsolicited and hence downward biased (also see Butler and Rogers, 2012; Woolley, Schroeder and Yang, 1996). Following prior literature, we assign a numerical value to each rating on a notch basis, with 1, 2, 3, 4, ………. denoting AAA or Aaa, AA+ or Aa1 and so on respectively.

11 Moody’s ratings when S&P ratings are unavailable. As seen in Table 1, initial bond ratings are not available for the entire sample. For those with ratings, the average bond rating is 2.51, which is equivalent to an S&P rating between AA+ and AA. The worse bond rating in our sample is 9, which is equivalent to an S&P rating of BBB. The average offering yield is 4.71% and the yield spread, over treasuries of the same maturity is -0.42. The minimum and the maximum offering yields are 1.20%, and 7.38% respectively. As the municipal bonds are tax exempt their yields are lower than corresponding treasuries.

The average underwriter’s gross spread is $10.08 per thousand dollars, with a minimum of $1.00 per thousand dollars, and a maximum of $29.19 per thousand dollars. And, on average, about 38% of all issues in the sample has some type of credit enhancement. Also, we construct a proxy for underwriter reputation using the annual market share measure of Megginson and Weiss (1991). We calculate underwriter market share using the total gross proceeds of the municipal bond offerings the underwriter managers in a year divided by the total gross proceeds of all municipal bond issuances in the year. We use the natural logarithm of this variable in our regressions. On average, underwriter’s total market share is 1.66%, with a minimum, and a maximum of 0.0001%, and 11.93% respectively.

In addition, we include four macroeconomic variables associated with bond yield. These variables are the closet benchmark Treasury rate, the 1-year Treasury rate, the difference between the 10-year and 2-year Treasury rate that describes (Term Slope) the slope of the yield curve, and the difference between the 30-day Eurodollar and 3-month Treasury bill rate (Eurodollar) that controls for other potential liquidity effects on municipal bonds relative to Treasury bonds.

Table 2, Panel A summarizes bond issuance activities by states. Municipal bond issuance activities differ across states. New York has the most bond deals followed by California and Texas. Hawaii has the smallest number of bond deals followed by Delaware. Though Hawaii has the smallest number of deals, the average proceeds raised per bond issue are the highest. The average offering yield ranges from 3.97% for Oklahoma to 5.25% for West Virginia. Pennsylvania and Utah have the highest average bond rating of 1.86 while Kentucky has the lowest average bond rating of 3.90.

12 4.2 State- level religious, political ideology, macro, and demographic variables Data on religious adherence is obtained using the “Churches and Church Membership” files from the American Religion Data Archive (ARDA). ARDA provides survey data on religious adherence at the state level for years 1990, 2000, and 2010. For each of the three survey years, we calculate Catholic faith as the number of Catholic adherents in the state divided by the state population. Following the approach in the recent literature (See Kumar, Page and Spalt, 2011; Hilary and Hui, 2009; Alesina and La Ferrara, 2000), we linearly interpolate the data to obtain the values in the intermediate years. As seen in Table 2, Panel B the states differ substantially in their religious characteristics. The percentage of the population that is catholic ranges from 3.19% in Tennessee to 48.33% in Rhode Island.

We use the Republican votes (in percentage) of the U.S. Presidential election at the state level as a proxy for Republican ideology. We collect the election results from the “American Presidency Project” for the election years: 1992, 1996, 2000, 2004, and 2008. And we linearly interpolate them for the intermediate years. As seen in Table 2, Panel B the state with the highest percentage of Republican votes is Oklahoma (58.30%), followed by Utah (57.61%). In contrast, the states with the lowest percentage of Republican votes are Rhode Island (32.35%) followed by Massachusetts (32.79%).

We include a broad set of state-level demographic characteristics in the analysis as control variables. We obtain these state-level demographic characteristics from the U.S. Census Bureau. The state demographic control variables are: total population of the state, the state level of education (which is the proportion of state population above age 25 that has completed a bachelor’s degree or higher), and the median age of the state. These variables are collected by U.S. Census Bureau every decade, so we linearly interpolate them for the intermediate years as done in recent literature.

The average median age is 35.26 years, and the minimum and the maximum are 30.95 years and 39.89 years respectively; on average, 24.05% of the population above the age of 25 years in our sample has completed a bachelor’s degree or higher, and the minimum and the maximum are 15.30% and 35.04% respectively; the average population size (in thousands) is 10,578, and the minimum and the maximum are 643, and 36226.

13 Also, we obtain the annual real GDP per capita by state covering the sample period from the U.S. Bureau of Economic Analysis (BEA). Additionally, we obtain the annual total debt outstanding by state from the State Government Finance data from the U.S. Census Bureau. From Table 1, Panel A, the overall average real GDP per capita is $39,232, with a minimum and a maximum of $21,171, and $60,974 respectively. From the same table, the overall average debt per GDP is 0.06, and has a minimum and a maximum values of 0.015, and 0.16 respectively.

4.3 Governor’s religious faith and political ideology

We use the National Governors Association website, Wikipedia.org, NNDB tracking the entire world (www.nndb.com), and various states department of archives and history to collect data on the religious and political party affiliation of the state’s governor. The variable Catholic Governor is a dummy variable that equals one if the current governor, as well as, the governor in the past term are both Catholic. The motivation for constructing Catholic governor dummy that way is simple; we expect that the longer the Catholic governor stays in office the stronger his or her impact would be observed on state economic and financial outcomes. The states with the highest percentage of Catholic governors are New York (25.72%) with Pennsylvania (12.19%) being a distant second. 18 states have never had consecutive Catholic governors in our sample period (See Table 2, Panel B).

Similarly, we define Republican governor as a dummy equal to one if for every two consecutive terms the governor is a Republican, otherwise zero. The motivation for constructing Republican governor dummy this way is same as that of Catholic governor. The state with the highest percentage of Republican governors are California (13.39%) followed by Texas (12.10%). Oregon, Washington, Maryland, West Virginia, and Kentucky have never had two consecutive Republican governors over our sample period.

5 Empirical Results

14 5.1 Determinants of bond ratings

In this section, we begin by examining the effect of religious belief, and political ideology on initial ratings for municipal bond issues.

We first examine the effect of residents’ religious belief (Catholic faith) on municipal bond ratings by estimating the following regression equation:

(1) where i denotes municipal bond issues, j denotes the state to which it belongs and t the year of issue. denotes state fixed effects and denotes year fixed effects. Ti denotes a vector of bond- specific characteristics and Zjt denotes a vector of state-specific characteristics. The variable of interest is Catholic Faith which is the fraction of the state population that is Catholic.

We include several variables to capture bond specific characteristics likely to affect bond ratings. Specifically, we include log of the dollar proceeds raised in the issue as well as the log of the maturity of the bonds. We include dummy variables that take the value of one if the bond is a general obligation bond and dummy variable, referred to as Negotiated bond, if the bond issue was a negotiated deal. We also include two variables to control for underwriter characteristics: 1) Minority Owned dummy that takes the value of one if the lead underwriter is owned by minorities and 2) Reputation of the underwriter which is the natural logarithm of the underwriter’s market share. The underwriter’s market share is measured as the percentage of total municipal bond value underwritten by a particular underwriter during the year.

To capture state specific variables with a bearing on credit ratings, religion, and political ideology, we include the log of the per capital GDP, the state outstanding debt per GDP, log of the state population, the median age of the population and lastly the level of education of the state population (measured as the proportion of state population above age 25 that has completed a bachelor’s degree or higher). Standard errors are adjusted for heteroskedasticity and clustered at the state-year level. We do not use the full sample for the bond rating regression, rather we include in our new sample only bond issues without any form of credit enhancement that has a bond rating. We do this because credit-enhanced municipal bonds’ ratings are determined by the credit quality of the credit-enhancing firm/entity, not the issuer of the municipal bonds. So, we exclude them from the full sample when running the regression model in equation (1).

15 Following prior literature (See Jiang, Stanford and Xie (2012), and Kedia, Rajgopal and Zhou (2014)) we use OLS to estimate the above equation.4

The results of this estimation are reported in column 1 of Table 4. The coefficient of Catholic Faith is positive and significant at 5% level. States with higher proportion of catholic residents have lower quality municipal bond ratings. This evidence is consistent with the hypothesis that Catholics have greater tolerance for risk taking and likely to be associated with risky behavior. Consequently, higher fraction of residents with catholic faith is viewed by the credit rating agencies as a greater source of credit risk.

The control variables tend to have the expected signs. Credit ratings are better for larger issues and for general obligation bonds. Negotiated bond issues have worse credit ratings and maturity of the bonds is not significant. Underwriters appear to be important – those with higher reputation and owned by minorities have lower ratings. State with older populations are associated with better credit ratings.

In column 2, we examine the impact of the state governor’s religious belief. As discussed above the dummy variable Catholic governor takes the value of one if for every two consecutive terms the governor is Catholic. The coefficient of Catholic governor is not significant. With the exception of state education level, the control variables have the same behavior as in the column 1. The coefficient of Education Rate is negative, implying that states with higher education levels have better credit ratings.

Next, we examine whether residents’ political ideology (Republican ideology) has any effects on municipal bond ratings. If states with higher proportion of residents who vote Republican tend to be more financially conservative and risk averse, then this is likely to be reflected in better ratings on the municipal bonds issued from such states. Consistent with our hypothesis, we find that the coefficient of Republican ideology is negative and significant (See Column 3). Higher fraction of Republican residents is associated with a better credit ratings on their municipal bonds. The estimated effects of other control variables are qualitatively similar to previous results in column 1 and 2.

4 For robustness, we also estimate an ordered Logit with qualitatively similar results. These results are not reported for brevity.

16 A similar signal for conservative policies can also be conveyed by a Governor that is Republican. In column 4, we include a dummy, Republican Governor that takes the value of one if for every two consecutive terms the governor is Republican. In line with the hypothesis we find that Republican governors are able to convince credit rating agencies that their states will be associated with fiscally conservative policies that warrant better credit ratings.

As seen in Table 3, Republican ideology and Republican governor are positively correlated. To examine if a Republican governor has an impact, over and above the residents political ideology we include both variables in Column 5. Both the political ideology of the residents as well as the governor have a significant effect on the credit ratings of municipal bonds. Finally, in column 6 we examine whether religious beliefs and political ideology independently impact credit ratings by including them both in our estimation. The coefficients of Catholic Faith, Republican ideology, as well as the Republican Governor are all significant and similar in magnitude to what was estimated in prior models. The results suggest that the effect of religious beliefs and political ideology on credit ratings appear to be independent of each other.

In summary, we can conclude that states with higher proportion of residents who are Catholic tend to have lower quality municipal bond ratings, whereas states with higher proportion of residents who are Republicans tend to have better ratings. Whereas, the religious beliefs of the governor are not significant, his political ideology has a significant effect on municipal bond ratings.

5.2. Effect on initial bond yields In this section we examine the effect of religious beliefs and political ideology on the initial yields of the municipal bonds. As discussed in the previous section, a higher fraction of catholic population is associated with worse credit ratings. This worse credit ratings, capturing greater credit risk, should be associated with higher initial bond yields. However, the lower credit ratings to states with higher fraction of Catholics reflects the credit rating agency’s view of how religious beliefs impact credit risk. The investors may ask for a higher yield for bonds from high catholic states, if they believe that the credit rating agency was conservative in its estimation of how religious beliefs impact credit risk. This implies that religious beliefs may

17 have a direct effect on yields along with the indirect effect through lower credit ratings. To test this we include Catholic Faith and the bond rating in the estimation of initial bond yields. In particular, we estimate the following

(2) where like before i denotes municipal bond issues, j denotes the state to which it belongs and t the year of issue. denotes state fixed effects and denotes year fixed effects. Xi denotes a vector of bond-specific characteristics including bond rating and macro-economic variables likely to impact bond yields. Zjt denotes a vector of state-specific characteristics. The variable of interest is Catholic Faith which like before, is the fraction of the state population that is Catholic. The bond specific characteristics included are those included previously along with bond ratings and a credit enhancement dummy. In line with Campbell and Taksler (2003) and Chen, Lesmond and Wei (2007) we include some macro-economic variables. We include 1) a maturity-matched Treasury yield, 2) the term slope which is the difference between 10-year and 2-year Treasury bills, 3) the 1-year Treasury bill rate, and 4) the 90-day euro dollar rate. The state-specific characteristics included are the same as in the prior model. Standard errors are adjusted for heteroskedasticity and clustered at the state-year level.

The results are displayed in Table 5, Column 1. The coefficient of Catholic faith is positive and significant at 5% level. As expected the coefficient of bond rating is positive and significant. Bonds with a worse rating (higher numerical values) have higher yields. Controlling for the bond rating, bonds from states with a higher fraction of Catholics are associated with higher yields.

The estimated effect of the control variables are as expected. Larger issues and those with higher maturity have higher yields. General obligation bonds and those with credit enhancement have lower yields. The reputation of the underwriter or whether it is minority owned does not matter for bond yields. Richer states i.e. those with higher per capital GDP have lower yields and those with more debt have higher yields.

In Column 2, we include the Catholic governor dummy and find that it is also positive and significant. Further, the potential of riskier activities as captured by the Governor religion is over and above the yield premium associated with the resident’s religions belief. As can be seen

18 in Model 3, both the coefficients of Catholic faith and that of Catholic Governor are positive and significant.

5.3 Republican ideology and bond yields We now test the relation between residents’ conservatism, as proxied by their political ideology, and municipal bond yields. As discussed above, we hypothesize that state with a higher fraction of Republican residents tend to be financially conservative, and risk averse. Thus, we expect this conservatism to be associated with lower initial bond yields. There is likely to be an indirect effect on yields through the better bond ratings of these bonds and a direct effect on the yield as well. To test this we estimate the model in equation 2, replacing religious beliefs with political ideology.

As hypothesized we find that the coefficient of Republican ideology is negative and significant (See Table 5, Column 4). In column 5, we include the Republican Governor dummy to proxy for the conservative values associated with Republicans. Contrary, to our hypothesis we find that the coefficient is positive and significant. This implies that Republican governors are associated with higher yields. We find a similar significant positive coefficient in Column 6 when we include both Republican ideology and Republican Governor dummy.

As seen in Table 3, the Republican Governor Dummy is significantly positively correlated with the Catholic Governor Dummy. If the governor is both a Republican and a Catholic, there is a conflict between the conservative Republican ideology and the greater risk taking supported by his religious beliefs. Classic examples of such governors are Governor Chris Christie of New Jersey, and Governor George Pataki of New York who served three consecutive four-year terms, who are both Catholic and Republican governors.5 To understand if this conflict explains the positive effect of Republican Governor on yields, we include the interaction of the Republican Governor with that of Catholic Governor. The results displayed in Column 1 of Table 6, show that the positive effect of Republican governors' to yields is mostly due to those governors that are also Catholic. The evidence suggests that religious beliefs with its effect on behavior is stronger than the effect of political ideology on behavior.

5 Governor George Pataki was a governor of New York from 01/1995 to 12/2006. Governor Chris Christie began serving as a governor of New Jersey from 01/2010.

19 This importance of religious beliefs is supported by Green and Neusner (1996) who argue that religion informs the everyday world not only through the formal activities of organized religion, but also through the creation of powerful structures that both inspire and shape the imagination. The importance of religious beliefs in shaping political views has also been articulated by politicians. For example, in the 2012 Vice Presidential debate between Vice President, Joe Biden, and Congressman Paul Ryan, both men acknowledged that their religious beliefs play a crucial role in their political views. Ryan said “I don’t see how a person can separate their public life from their private life or their faith; our faith informs us in everything we do.” Biden said “My religion defines who I am.”

The positive effect of Republican Governor on yields could also be due to the fact that they are governors in democratic states. For example, Governor Lincoln C. Almond, and Governor Donald Carcieri were Republican governors in Rhode Island. And Governor Paul Celluci, Governor Jane Swift, and Governor Mitt Romney were Republican governors in Massachusetts.6 Rhode Island, and Massachusetts are solid democratic states. In this case the conservatism of Republican governor may be moderated to accommodate the democratic ideology of the residents. Table 2, Panel B shows that about 63% of Republican governors were governors in solidly Democratic or Democratic leaning states, whereas about 35% of Republican governors served in the top 10 solidly Democratic states. To examine this, we create a dummy variable, referred to as low Republican ideology that takes the value of one if the fraction of republican residents are in the bottom 25 percentile. We then interact this low Republican ideology dummy with the Republican Governor dummy to capture the behavior of Republican governors in democratic states. As seen in Column 2 of Table 6, the coefficient of this interaction term is positive and significant while that of Republican dummy is not significant.

Similarly, the Republican Governor may moderate his or her conservatism if the residents of the state are primarily Catholic. Residents who are Catholic are likely to vote for a Governor who share similar political views, or at least is not seen in opposition to these views. Therefore a Republican governor running for office in a state with a high fraction of Catholics may hold or

6 Governor Lincoln C. Almond, and Governor Donald Carcieri served as governors in Rhode Island from 01/1995 to 01/2003, and from 01/2003 to 01/2011 respectively. Governor Paul Cellucci, Governor Jane Swift, and Governor Mitt Romney served as governors in Massachusetts from 07/1997 to 04/2001, from 04/2001 to 01/2003, and from 01/2003 to 01/2007 respectively.

20 espouse moderately conservative views in order to win the next gubernatorial elections. To control for this we create a dummy variable, referred to as High Catholic Faith that takes the value of one if the state is in the top 25% of Catholic faith. As seen in Column 3, the coefficient of High Catholic Faith is positive and significant. The interaction of High Catholic faith and Republican Governor is not significant. The behavior of Republican governors is not different when a higher fraction of residents are catholic.

Lastly, we examine whether religious beliefs and political ideology have independent effects on yield. To test this we include both Catholic faith and Republican Ideology in our estimation and find that both coefficients are significant (see Model 4 of Table 6). The coefficient of Catholic faith is positive, implying that greater risk taking engendered by resident’s Catholic beliefs is associated with investors demanding a higher yield from municipal bonds from the state. The coefficient of Republican Ideology is negative, suggesting that conservative policies associated with the Republican residents lead the markets to accept a lower yield for bonds issued from the state.

In summary, we find that the religious beliefs and the political ideology of the residents in a state have a significant effect on the initial yields of municipal bonds. Whereas the religious beliefs of the Governor are significant, his political ideology is moderated towards the beliefs and ideology of the state’s residents and consequently not significant.

5.4 Determinants of Gross Underwriter Spread

We also examine the effect of state resident’s religious beliefs and political ideology on the gross spread charged by the underwriter. The Gross Spread is the difference between the offer price to investors and the price the bonds are purchased from the issuer by the underwriter. The gross spread compensates the underwriters for services rendered for the bond issue. Butler (2007) examines gross spreads and finds that local underwriters are more informed and are associated with lower gross spreads. If the state has a higher fraction of residents that are Catholic and therefore risk taking, the underwriter may have to work harder to convince investors to buy these securities. This higher effort expended by the underwriter is likely to be associated with a higher gross spreads. Similarly, if bonds from states with a higher fraction of Republican residents

21 with a conservative ideology are associated with lower risk taking, it may require less effort on the underwriter to sell these bonds. Consequently, bonds from states with a Republican resident base may be associated with lower yields.

To examine this we estimate a model of Gross Spreads. The main variable of interest is the resident’s religious beliefs and their political ideology. The control variables include bond characteristics as well as state characteristics, in line with the previous estimations. We also include “pay-to-play” dummy to control for its impact on gross spread. We begin by including Catholic Faith and find that it is positive and significant. As hypothesized, states with a higher fraction of Catholics have to pay higher gross spreads for their municipal bonds (See column 1, Table 7). The coefficient of Catholic Governor is also positive and significant (Column 2), suggesting that the governor’s religious beliefs also impact underwriters fees. Finally, in column 3 we include both Catholic Faith and Catholic Governor and find that both are positive and significant. The coefficient of Republican ideology is negative and significant, as seen in Model 4, and points to lower underwriting fees for bonds issued by states with a higher fraction of republicans. Like before the political affiliation of the Governor does not matter, the Republican Governor dummy is not significant in Model 5 or Model 6.

6 Conclusion We examine the effect of state resident’s religious beliefs and political ideology on municipal bond issues. Catholics are known to be tolerant to gambling and risk taking. States with a high fraction of Catholic residents are likely to engage in activities that are riskier or have gambling like payoffs. This increases the credit risk of bonds issued by these states. Consistent with this we find that bonds issued by states with a higher fraction of Catholics have worse credit rating, higher initial yields and higher gross spreads. A Catholic governor also impacts municipal bond issues. The evidence suggests that states with Catholic governors are associated with higher yields and gross spreads, though it does not impact bond ratings.

Political ideology of the resident and the governor can also impact municipal bonds. Republicans are associated with more conservative policies and therefore less likely to spend over their budgets and undertake projects with risky outcomes. Therefore, bonds issued by states with a higher fraction of Republicans should be perceived to be less risky. Consistent with this

22 we find that states with a higher fraction of republican residents have better credit ratings, lower yields and lower gross spreads. Republican governors are associated with better credit ratings, and lower gross spread.

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25 Appendix: Variable Definition and Data Source This table reports the definition of the variables used in this study and the source of the data. In addition, we describe how various variables are constructed in this table. ARDA denotes the American Religion Data Archive; NGA denotes the National Governors Association; state’s website represents the various states department of archives and history; BEA denotes the Bureau of Economic Analysis; FRED denotes Federal Reserve Economic Data; SGF denotes the State Government Finance data from U.S. Census; NNDB denotes the Notable Names Database (www.nndb.com); SDC denotes the Securities Data Company; APP denotes the American Presidency Project; SEC denotes U.S. Securities and Exchange Commission.

Variable Data Source Religious belief and political ideology variables

Catholic faith ARDA

Catholic governor NNDB, NGA, Wikipedia, States' website

Republican ideology APP, and U.S. Census

Republican governor NNDB, NGA, Wikipedia, States' website

Catholic & Republican NNDB, NGA, Wikipedia, States' website governor

Republican ideology APP, and U.S. Census (bottom 25%) or Rep25

Republican ideology APP, and U.S. Census (top 25%) or Rep75

26 Catholic faith (top ARDA 25%) or Cath75

Bond-level variables

Proceeds SDC

Negotiated bond SDC

Yield SDC

Credit enhancement SDC

Bond rating SDC

Minority underwriter SDC

Go bond SDC

Maturity SDC

Underwriter market SDC share

27 Gross spread SDC

Pay-to-play SEC

Matching treasury FRED

T-note FRED

Term slope FRED

Eurodollar FRED

State macroeconomic and demographic variables

Per capita GDP BEA

Debt per GDP SGF, BEA

Education rate U.S. Census

Median age U.S. Census

Population size U.S. Census, SGF

28 Table 1: Summary statistics of Municipal Bond Issues The sample includes all municipal bond issued over the period 1990 to 2010. Proceeds is the dollar value (in millions) raised. Negotiated bond is a dummy that takes the value of one if the bond was issued through a negotiated deal. Variable Mean Std. Dev. Media p25 p75 Min Max Obs. n Proceeds 22.97 57.41 5.00 1.63 15.3 0.086 399.88 25852 5 Maturity 16.89 14.61 15.59 9.00 21.00 1.00 99.00 25844 4 Negotiated bond 0.58 0.49 1 0 1 0 1 25852 5 Go bond 0.61 0.49 1 0 1 0 1 25852 5 Underwriter Market share 1.66 2.95 0.29 0.06 1.37 0.000 11.93 25852 1 5 Minority indicator 0.012 0.11 0 0 0 0 1 25852 5 Credit enhancement 0.38 0.48 0 0 1 0 1 25852 5 Bond rating 2.51 2.15 1.00 1.00 4.00 1.00 9.00 15764 9 Gross spread 10.08 5.89 8.75 5.80 13.10 1.00 29.19 10898 1 Yield 4.71 1.17 4.75 4.09 5.45 1.20 7.38 11837 3 Yield spread -0.42 0.76 -0.48 -0.88 -0.06 -2.04 2.25 11836 0

T-note rate 3.914 1.976 4.290 2.220 5.460 0.260 8.110 25852 5 90 day-eurodollar rate 0.437 0.317 0.350 0.228 0.512 0.126 1.909 25852 5 Term slope 1.134 0.915 1.090 0.260 2.030 -0.380 2.770 25852 5 Matching treasury rate 5.364 1.471 5.390 4.530 6.380 0.860 8.480 25844 4 Catholic faith (%) 22.77 11.24 21.05 15.06 30.94 3.02 48.91 25852 5 Republican ideology (%) 44.25 8.53 43.05 37.55 49.63 29.35 65.60 25852

29 5 Republican governor 0.393 0.488 0 0 1 0 1 25852 5 Catholic governor 0.267 0.442 0 0 1 0 1 25306 0 Per capita GDP 39232 10700 40861 28993 47617 21171 60974 25852 5 Debt per GDP 0.06 0.03 0.05 0.034 0.071 0.015 0.16 25852 5 Education rate 24.05 4.35 23.72 20.93 26.97 15.30 35.04 25852 5 Median age 35.26 1.97 35.30 33.83 36.64 30.95 39.89 25852 5 Population size 10578 8679 7079 4461 12910 643 36226 25852 5

Table 2: Summary Statistics of Municipal bond issues by State The sample consists of municipal bonds issued from 1990 to 2010. The table reports average maturity and proceeds raised for all bonds issued from a state. The yield is the offering yield. Credit enhancement is a dummy variable that takes the value of one if the bond issue is associated with a credit enhancement. Bond Rating is the numerical value of S&P ratings (or Moody’s ratings if S&P ratings are not available).

State Number of Maturity Proceeds Yield Credit Bond rating Bonds (years) ($million) (%) enhancement (%) Alabama 3,462 21.80 18.16 5.02 1.94 2.18 Alaska 460 19.99 58.85 4.98 0.37 1.93 Arizona 3,272 18.88 31.64 4.96 1.99 2.33 Arkansas 3,671 19.95 7.21 4.97 0.75 3.65 California 18,442 22.66 42.74 5.01 9.60 2.41 Colorado 4,210 20.86 24.75 4.86 2.17 2.67 Connecticut 3,129 16.11 55.92 4.60 1.10 2.39 Delaware 334 25.63 55.38 5.07 0.18 2.53 Florida 6,238 23.04 47.13 5.08 4.15 2.00 Georgia 3,285 21.01 41.87 4.72 1.74 2.65 Hawaii 244 22.14 120.62 5.15 0.16 2.25

30 Idaho 891 18.02 14.68 4.80 0.36 2.39 Illinois 13,920 16.57 17.18 4.63 5.61 2.24 Indiana 6,155 17.85 16.62 4.96 2.30 2.82 Iowa 7,328 13.92 6.09 4.56 1.17 3.33 Kansas 5,967 13.87 9.57 4.53 1.15 2.50 Kentucky 4,232 18.48 15.57 4.79 1.12 3.90 Louisiana 3,213 18.56 19.87 5.04 1.36 2.82 Maine 824 18.56 23.62 4.73 0.29 2.66 Maryland 1,741 23.11 57.04 4.96 0.70 2.64 Massachusetts 6,608 14.86 31.88 4.44 2.31 2.47 Michigan 9,512 18.59 16.79 4.98 4.16 2.44 Minnesota 13,705 14.22 8.93 4.38 2.69 3.55 Mississippi 2,326 18.22 16.16 4.81 0.73 3.43 Missouri 7,007 17.36 12.30 4.67 2.03 2.41 Montana 967 17.37 8.84 4.48 0.19 3.37 Nebraska 5,606 13.58 6.10 4.73 0.39 2.50 Nevada 1,213 21.06 50.05 4.92 0.67 2.19 New Hampshire 822 22.01 24.43 4.89 0.32 2.94 New Jersey 10,193 12.36 19.74 4.32 4.14 2.06 New Mexico 1,762 15.29 23.02 4.57 0.71 2.95 New York 21,653 11.24 29.37 4.35 7.17 2.58 North Carolina 2,717 19.61 42.53 4.93 1.19 2.61 North Dakota 1,631 15.76 5.60 4.56 0.24 3.87 Ohio 13,518 14.45 14.49 4.34 3.69 2.47 Oklahoma 4,399 10.53 9.94 3.97 0.60 3.02 Oregon 2,969 17.18 21.29 4.81 1.01 2.50 Pennsylvania 11,856 19.51 22.53 4.84 9.85 1.86 Rhode Island 962 17.87 25.77 4.81 0.55 2.21 South Carolina 2,602 17.81 29.15 4.66 1.15 2.65 South Dakota 1,073 16.11 13.15 4.50 0.31 2.56 Tennessee 3,456 18.10 25.51 4.85 1.73 2.82 Texas 18,221 19.66 26.84 5.01 9.69 1.94 Utah 1,690 18.85 24.37 4.57 0.75 1.86

31 Vermont 326 25.06 31.30 4.99 0.16 3.15 Virginia 2,602 22.47 47.67 4.96 0.84 2.76 Washington 5,948 17.18 26.99 4.87 2.74 2.28 West Virginia 596 22.17 27.93 5.25 0.29 3.05 Wisconsin 11,064 12.16 9.32 4.35 3.02 2.87 Wyoming 503 18.68 12.21 4.75 0.12 3.21

32 Table 2B: Religious and Political Ideology by State The table reports by state the distribution of religious and political characteristics. Catholic faith denotes the percentage of residents in a state who are Catholic. Catholic governor is a dummy variable that takes the value of one if for every two consecutive terms the governor is a Catholic. Republican governor is a dummy variable that takes the value of one if for every two consecutive terms the governor is a Republican. Catholic & Republican governor is a dummy variable that takes the value of one if the governor is both Catholic and Republican. And Republican ideology is the percentage of Republican votes at the state-level in the U.S. Presidential elections.

State Catholic Catholic Republican Republican Catholic & faith (%) governor governor ideology (%) republican (%) (%) governor (%) Alabama 3.59 0.00 2.35 55.02 0.00 Alaska 8.20 0.00 0.07 52.24 0.00 Arizona 17.62 0.00 0.88 47.90 0.00 Arkansas 4.00 0.00 1.47 47.79 0.00 California 27.60 9.91 13.39 38.20 8.62 Colorado 16.46 2.90 1.20 45.49 3.21 Connecticut 39.46 1.19 1.74 37.95 1.71 Delaware 19.06 0.15 0.14 38.97 0.70 Florida 14.57 2.22 2.71 46.46 4.45 Georgia 4.62 0.00 0.77 50.43 0.00 Hawaii 19.82 0.26 0.04 36.42 0.00 Idaho 8.78 0.00 0.35 55.52 0.00 Illinois 30.56 0.00 8.55 38.74 0.00 Indiana 12.91 0.00 0.44 50.76 0.00 Iowa 18.31 8.39 3.22 43.96 11.89 Kansas 15.01 1.36 0.88 53.27 0.00 Kentucky 9.52 0.00 0.00 52.36 0.00 Louisiana 30.19 0.53 0.66 50.11 0.00 Maine 20.06 0.27 0.38 37.36 0.00 Maryland 16.94 0.39 0.00 38.21 0.00 Massachusetts 47.84 0.62 3.91 32.79 0.73 Michigan 21.03 9.64 3.48 41.72 8.05 Minnesota 24.57 0.83 6.17 40.34 0.00 Mississippi 3.89 0.00 0.90 53.98 0.00 Missouri 14.54 0.00 1.11 45.76 0.00 Montana 16.57 0.36 0.62 48.21 0.40

33 Nebraska 21.23 1.10 3.81 57.45 2.04 Nevada 15.66 0.90 0.46 43.33 0.00 New Hampshire 29.95 0.30 0.47 43.24 0.00 New Jersey 39.70 0.00 1.22 40.93 0.00 New Mexico 33.28 0.63 0.27 43.35 0.00 New York 38.03 25.72 6.62 35.17 17.22 North Carolina 3.74 0.73 0.63 50.25 0.00 North Dakota 26.96 0.99 0.97 52.94 3.14 Ohio 19.16 3.29 5.46 44.18 6.31 Oklahoma 4.78 2.14 0.66 58.30 1.71 Oregon 10.13 0.59 0.00 40.14 0.00 Pennsylvania 30.12 12.19 1.39 42.54 3.69 Rhode Island 48.33 0.26 0.52 32.35 2.28 South Carolina 3.37 0.00 1.77 53.08 0.00 South Dakota 21.64 0.41 1.24 51.57 2.05 Tennessee 3.19 0.00 0.36 49.50 0.00 Texas 20.28 0.00 12.10 53.09 0.00 Utah 4.59 0.00 1.89 57.61 0.00 Vermont 23.76 0.00 0.08 34.08 0.00 Virginia 7.85 0.00 0.32 48.35 0.00 Washington 11.60 0.58 0.00 38.43 0.00 West Virginia 5.73 0.08 0.00 46.46 0.00 Wisconsin 30.10 11.66 6.86 42.79 19.68 Wyoming 14.23 0.23 0.11 56.35 0.00

34 Table 3: Correlation matrix

Catholic faith denotes the percentage of residents in a state who are Catholic. Catholic governor is a dummy variable that takes the value of one if for every two consecutive terms the governor is a Catholic. Republican ideology is the percentage of Republican votes at the state-level in the U.S. Presidential elections. Republican governor is a dummy variable that takes the value of one if for every two consecutive terms the governor is a Republican. Catholic & Republican governor is a dummy variable that takes the value of one if the governor is both Catholic and Republican. Republican ideology (bottom 25%) is a dummy variable that takes the value of one if a state’s Republican votes (in %) is in the bottom 25 percentile. Republican ideology (top 25%) is a dummy variable that takes the value of one if a state’s Republican votes (in %) is in the top 25 percentile. Catholic faith (top 25%) is a dummy variable that takes the value of one if a state’s Catholic population (in %) is in the top 25 percentile.

(1) (2) (3) (4) (5) (6) (7) (8) Catholic faith 1.000

Catholic governor 0.265** 1.000

(0.000)

Republican ideology -0.559** -0.217** 1.000

(0.000) (0.000)

Republican governor 0.124** 0.117** 0.060** 1.000

(0.000) (0.000) (0.000)

Republican & Catholic 0.171** 0.644** -0.092** 0.477** 1.000 Governor (0.000) (0.000) (0.000) (0.000)

Democratic ideology 0.505** 0.197** -0.374** 0.005* 0.088** 1.000 (top 25%) (0.000) (0.000) (0.000) (0.014) (0.000)

Republican ideology -0.457** -0.209** 0.808** 0.128** -0.103** -0.333** 1.000

(top 25%) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

Catholic faith 0.747** 0.263** -0.451** 0.108** 0.204** 0.401** -0.329** 1.000

(top 25%) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

Table 4: Determinants of bond rating

35 The dependent variable is the initial S&P bond rating on municipal bonds issued over the period 1990 to 2010. Catholic faith (Republican Ideology) denotes the percentage of residents in a state who are Catholic (Republican). Catholic (Republican) governor is a dummy variable that takes the value of one if for every two consecutive terms the governor is a Catholic (Republican). Minority underwriter is a dummy variable that takes the value of one for bonds for which the lead underwriter is owned by minorities. Go (negotiated) bond is a dummy variable that takes the value of one if the bond is a general obligation (issued through a negotiated deal). Reputation is the natural logarithm of underwriter market share. Debt per GDP is the ratio of state’s total outstanding debt to its GDP. Education rate is the percentage of state population above age 25 that has a bachelor’s degree or higher. T statistics are reported in parentheses below. *,**,*** represent significance at the 10%, 5% and 1% level respectively,

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Catholic faith 0.0493** 0.0416*

(2.04) (1.70)

Catholic governor -0.00233

(-0.04)

Republican ideology -0.0144* -0.0154* -0.0143*

(-1.80) (-1.96) (-1.76)

Republican governor -0.128*** -0.132*** -0.120***

(-3.03) (-3.17) (-2.90)

Ln(Proceeds) -0.434*** -0.424*** -0.434*** -0.433*** -0.434*** -0.434***

(-30.92) (-29.61) (-30.62) (-30.48) (-30.45) (-30.73)

Minority underwriter -0.260*** -0.270*** -0.265*** -0.258*** -0.263*** -0.264***

(-2.92) (-3.03) (-2.96) (-2.89) (-2.95) (-2.95)

General Obligation bond -1.324*** -1.338*** -1.324*** -1.325*** -1.324*** -1.323***

(-23.19) (-22.80) (-23.09) (-23.15) (-23.13) (-23.18)

Negotiated bond 0.306*** 0.298*** 0.301*** 0.302*** 0.301*** 0.303***

(6.96) (6.68) (6.85) (6.90) (6.85) (6.90)

Ln(Maturity) 0.0453 0.0306 0.0440 0.0455 0.0459 0.0470

(1.52) (1.01) (1.46) (1.52) (1.53) (1.58)

Reputation -0.083*** -0.085*** -0.083*** -0.084*** -0.084*** -0.0849***

(-12.71) (-12.84) (-12.67) (-12.74) (-12.70) (-12.70)

Ln(Per capita GDP) 0.162 0.0675 0.142 -0.137 -0.0335 0.0790

(0.35) (0.13) (0.28) (-0.28) (-0.07) (0.17)

Debt per GDP 1.459 2.361 0.988 0.468 -0.366 -0.409

(0.66) (1.11) (0.43) (0.22) (-0.16) (-0.18)

Education rate -0.0825 -0.102** -0.122** -0.0920* -0.122** -0.110

(-1.61) (-2.02) (-2.22) (-1.90) (-2.24) (-1.90)

Median age -0.113* -0.162*** -0.149** -0.165*** -0.173*** -0.145**

36 (-1.81) (-2.74) (-2.49) (-2.88) (-2.99) (-2.33)

Ln(Population) 0.0505 0.352 0.566 0.642 0.720 0.322

(0.07) (0.52) (1.00) (1.16) (1.28) (0.46)

Constant Yes Yes Yes Yes Yes Yes

Year & State dummies Yes, Yes Yes, Yes Yes, Yes Yes, Yes Yes, Yes Yes, yes

Adjusted R-squared 0.290 0.288 0.290 0.290 0.291 0.291

Observations 64427 62793 64427 64427 64427 64427

37 Table 5: Determinants of Bond Offering Yield

The dependent variable is the offering yield for municipal bonds issued over the period 1990 to 2010. Catholic faith (Republican Ideology) denotes the percentage of residents in a state who are Catholic (Republican). Catholic (Republican) governor is a dummy variable that takes the value of one if for every two consecutive terms the governor is a Catholic (Republican). Bond Rating is the numerical value of S&P ratings (or Moody’s ratings if S&P ratings are not available). Minority underwriter is a dummy variable that takes the value of one for bonds for which the lead underwriter is owned by minorities. GO (Negotiated) bond is a dummy variable that takes the value of one if the bond is a general obligation (negotiated) bond. Reputation is the natural logarithm of underwriter market share. Credit enhancement is a dummy variable that takes the value of one if the bond issue is associated with a credit enhancement. Matching treasury is the nominal rate on a treasury bond of similar maturity. T-note is 1- year Treasury note rate. Term slope is the difference between 10-year and 2-year Treasury rates. Eurodollar is the difference between the 30-day Eurodollar rate and the 3-month Treasury bill rate. Debt per GDP is ratio of state’s outstanding debt to GDP. Education rate is the percentage of state above age 25 that has a bachelor’s degree or higher. T statistics are reported in parentheses below. *,**,*** represent significance at the 10%, 5% and 1% level respectively.

Religious belief Political ideology (1) (2) (3) (4) (5) (6) Catholic faith 0.016** 0.017*** (2.45) (2.64) Catholic governor 0.041** 0.034* (2.06) (1.88) Republican ideology -0.006* -0.006* (-1.80) (-1.82) Republican governor 0.033* 0.032** (1.93) (1.97) Bond Characteristics Bond rating 0.066*** 0.065*** 0.065*** 0.066*** 0.066*** 0.066*** (22.21) (21.37) (21.39) (22.30) (22.19) (22.29) Ln(Proceeds) 0.006** 0.006** 0.006** 0.006** 0.006** 0.006** (2.19) (2.35) (2.35) (2.06) (2.14) (2.02) Minority underwriter 0.008 0.007 0.007 0.007 0.006 0.005 (0.54) (0.48) (0.52) (0.48) (0.46) (0.40) General Obligation bond -0.032*** -0.033*** -0.033*** -0.032*** -0.032*** -0.032*** (-3.50) (-3.57) (-3.60) (-3.57) (-3.46) (-3.58) Negotiated bond 0.091*** 0.090*** 0.091*** 0.091*** 0.091*** 0.091*** (12.45) (12.16) (12.18) (12.59) (12.43) (12.58) Ln(Maturity) 0.698*** 0.694*** 0.694*** 0.697*** 0.698*** 0.697*** (38.08) (36.94) (36.82) (38.24) (38.21) (38.20)

38 Reputation 0.001 0.001 0.001 0.001 0.001 0.001 (1.09) (1.16) (1.16) (1.21) (1.25) (1.34) Credit enhancement -0.087*** -0.085*** -0.085*** -0.087*** -0.087*** -0.088*** (-11.33) (-10.99) (-10.93) (-11.42) (-11.32) (-11.35) Macro-Economic Controls Matching treasury 0.391*** 0.395*** 0.395*** 0.391*** 0.390*** 0.391*** (21.95) (21.58) (21.53) (22.02) (22.21) (22.22) T-note 0.129*** 0.123*** 0.123*** 0.129*** 0.130*** 0.130*** (4.97) (4.59) (4.59) (4.96) (5.01) (5.01) Eurodollar 0.459*** 0.461*** 0.460*** 0.460*** 0.460*** 0.460*** (16.28) (16.04) (16.04) (16.28) (16.24) (16.24) Term slope 0.131*** 0.123*** 0.123*** 0.130*** 0.132*** 0.132*** (3.52) (3.23) (3.23) (3.52) (3.56) (3.56) State Level Controls Ln(Per capita GDP) -0.242 -0.293** -0.272* -0.212 -0.211 -0.167 (-1.62) (-2.10) (-1.92) (-1.34) (-1.37) (-1.00) Debt per GDP 0.735* 0.636 0.475 0.786* 1.318** 1.194** (1.68) (1.52) (1.21) (1.83) (2.18) (2.20) Education rate 0.001 0.002 0.005 -0.017 -0.004 -0.018 (0.13) (0.18) (0.58) (-1.09) (-0.36) (-1.15) Median age -0.015 -0.027 -0.024 -0.023 -0.014 -0.0156 (-1.06) (-1.65) (-1.51) (-1.47) (-0.95) (-1.07) Ln(Population) -0.256 -0.208 -0.397** -0.097 -0.155 -0.141 (-1.58) (-1.37) (-1.99) (-0.82) (-1.16) (-1.09) Constant Yes Yes Yes Yes Yes Yes Year dummies Yes Yes Yes Yes Yes Yes State dummies Yes Yes Yes Yes Yes Yes Adjusted R-squared 0.860 0.858 0.858 0.860 0.860 0.860 Observations 92730 90454 90454 92730 92730 92730

39 Table 6: Determinants of Bond Yields The dependent variable is the offering yield for municipal bonds issued over the period 1990 to 2010. Catholic faith (Republican Ideology) denotes the percentage of residents in a state who are Catholic (Republican). Catholic (Republican) governor is a dummy variable that takes the value of one if for every two consecutive terms the governor is a Catholic (Republican). Low Republican ideology (High Catholic Faith) is a dummy variable that is equal to one if the state’s republican (catholic) population is in the bottom (top) 25th percentile. Bond Rating is the numerical value of S&P ratings (or Moody’s ratings if S&P ratings are not available). Minority underwriter is a dummy variable that takes the value of one for bonds for which the lead underwriter is owned by minorities. GO (Negotiated) bond is a dummy variable that takes the value of one if the bond is a general obligation (negotiated) bond. Reputation is the natural logarithm of underwriter market share. Credit enhancement is a dummy variable that takes the value of one if the bond issue is associated with a credit enhancement. Matching treasury is the nominal rate on a treasury bond of similar maturity. T-note is 1-year Treasury note rate. Term slope is the difference between 10-year and 2-year Treasury rates. Eurodollar is the difference between the 30-day Eurodollar rate and the 3-month Treasury bill rate. Debt per GDP is ratio of state’s outstanding debt to GDP. Education rate is the percentage of state above age 25 that has a bachelor’s degree or higher. T statistics are reported in parentheses below. *,**,*** represent significance at the 10%, 5% and 1% level respectively.

Model 1 Model 2 Model 3 Model 4 Republican governor 0.011 0.009 0.030 (0.99) (0.97) (1.57) Catholic governor 0.005 (0.28) Republican Governor x Catholic Governor 0.072 (1.46) Low Republican ideology 0.026 (1.28) Low Republican Ideology x Republican Governor 0.090** (2.24) High Catholic faith 0.042* (1.85) High Catholic Faith x Republican Governor 0.001 (0.05) Catholic faith 0.015** (2.48) Republican ideology -0.005* (-1.75) Bond Characteristics Bond rating 0.065*** 0.066*** 0.066*** 0.065*** (21.27) (22.11) (22.15) (22.30) Ln(Proceeds) 0.006** 0.006** 0.006** 0.006**

40 (2.24) (2.04) (2.10) (2.08) Minority Underwriter 0.006 0.005 0.006 0.007 (0.43) (0.35) (0.42) (0.49) General Obligation bond -0.033*** -0.031*** -0.032*** -0.032*** (-3.54) (-3.39) (-3.45) (-3.61) Negotiated bond 0.090*** 0.092*** 0.091*** 0.091*** (12.14) (12.36) (12.45) (12.60) Ln(Maturity) 0.694*** 0.697*** 0.698*** 0.697*** (36.83) (38.30) (38.15) (38.09) Reputation 0.002 0.001 0.001 0.001 (1.51) (1.15) (1.23) (1.19) Credit Enhancement -0.086*** -0.089*** -0.088*** -0.087*** (-10.82) (-11.21) (-11.33) (-11.38) Macro-Economic Controls Matching Treasury 0.394*** 0.390*** 0.390*** 0.391*** (21.93) (22.44) (22.17) (21.96) T-note 0.124*** 0.130*** 0.131*** 0.129*** (4.66) (5.06) (5.04) (4.97) Eurodollar rate 0.461*** 0.459*** 0.460*** 0.460*** (16.00) (16.24) (16.23) (16.28) Term slope 0.124*** 0.132*** 0.133*** 0.131*** (3.27) (3.58) (3.58) (3.53) State Characteristics Ln(Per capita GDP) -0.281** -0.212 -0.204 -0.201 (-2.09) (-1.46) (-1.33) (-1.26) Debt per GDP 1.267** 1.151** 1.468** 0.645 (2.07) (2.28) (2.41) (1.59) Education rate -0.005 -0.002 -0.003 -0.012 (-0.44) (-0.21) (-0.32) (-0.84) Median age -0.010 -0.021 -0.014 -0.017 (-0.67) (-1.37) (-1.01) (-1.18)

41 Ln(Population) -0.151 -0.161 -0.194 -0.232 (-1.27) (-1.25) (-1.28) (-1.53) Constant Yes Yes Yes Yes Year dummies Yes Yes Yes Yes State dummies Yes Yes Yes Yes Adjusted R-squared 0.858 0.861 0.860 0.860 Observations 90454 92730 92730 92730

Table 7: Determinants of Gross Spread The dependent variable is the gross underwriters spread for municipal bonds issued over the period 1990 to 2010. Catholic faith (Republican Ideology) denotes the percentage of residents in a state who are Catholic (Republican). Catholic (Republican) governor is a dummy variable that takes the value of one if for every two consecutive terms

42 the governor is a Catholic (Republican). Bond Rating is the numerical value of S&P ratings (or Moody’s ratings if S&P ratings are not available). Minority underwriter is a dummy variable that takes the value of one for bonds for which the lead underwriter is owned by minorities. GO (Negotiated) bond is a dummy variable that takes the value of one if the bond is a general obligation (negotiated) bond. Reputation is the natural logarithm of underwriter market share. Credit enhancement is a dummy variable that takes the value of one if the bond issue is associated with a credit enhancement. Matching treasury is the nominal rate on a treasury bond of similar maturity. T-note is 1- year Treasury note rate. Term slope is the difference between 10-year and 2-year Treasury rates. Eurodollar is the difference between the 30-day Eurodollar rate and the 3-month Treasury bill rate. Debt per GDP is ratio of state’s outstanding debt to GDP. Education rate is the percentage of state above age 25 that has a bachelor’s degree or higher. T statistics are reported in parentheses below. *,**,*** represent significance at the 10%, 5% and 1% level respectively.

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Catholic faith 0.0132*** 0.0124*** (5.28) (4.68) Catholic governor 0.0221*** 0.0170*** (3.43) (2.88) Republican ideology -0.0037*** -0.0037*** (-2.60) (-2.62) Republican governor -0.0087 -0.00873 (-1.49) (-1.53) Bond Characteristics Bond rating 0.0149*** 0.0149*** 0.0148*** 0.0150*** 0.0150*** 0.0149*** (7.71) (7.52) (7.47) (7.75) (7.76) (7.75) Ln(Proceeds) -0.172*** -0.170*** -0.170*** -0.171*** -0.171*** -0.171*** (-28.81) (-28.14) (-28.13) (-28.80) (-28.78) (-28.78) Minority underwriter 0.0188 0.0178 0.0183 0.0179 0.0187 0.0182 (1.55) (1.47) (1.50) (1.49) (1.56) (1.52) General Obligation bond 0.00174 0.00294 0.00284 0.00185 0.00204 0.00184 (0.34) (0.56) (0.54) (0.35) (0.39) (0.35) Negotiated bond 0.0314*** 0.0309*** 0.0319*** 0.0305*** 0.0305*** 0.0305*** (3.15) (3.06) (3.16) (3.03) (3.05) (3.03) Ln(Maturity) 0.0228*** 0.0234*** 0.0237*** 0.0227*** 0.0226*** 0.0228*** (4.21) (4.21) (4.29) (4.17) (4.15) (4.19) Reputation 0.00789*** 0.00776*** 0.00766*** 0.008*** 0.00798*** 0.00796*** (6.25) (6.07) (5.99) (6.34) (6.31) (6.31) Credit Enhancement -0.0436*** -0.0428*** -0.0433*** -0.0429*** -0.0430*** -0.0430*** (-5.79) (-5.57) (-5.66) (-5.66) (-5.70) (-5.68)

43 Pay-to-play 0.162*** 0.113** 0.145*** 0.0494 0.0660** 0.0435 (3.14) (1.97) (2.86) (0.62) (2.15) (0.54) State Characteristics Ln(Per capita GDP) -0.00828 -0.0598 -0.0472 -0.0120 -0.0305 -0.0205 (-0.12) (-0.79) (-0.66) (-0.16) (-0.41) (-0.28) Debt per capita -0.247 -0.377 -0.463 -0.291 -0.232 -0.387 (-0.77) (-1.13) (-1.42) (-0.96) (-0.75) (-1.33) Education rate 0.0229*** 0.0232*** 0.0267*** 0.0123 0.0198** 0.0127 (2.80) (2.67) (3.19) (1.24) (2.37) (1.29) Median age 0.00378 -0.00316 0.00187 -0.00648 -0.00489 -0.00748 (0.52) (-0.40) (0.26) (-0.83) (-0.61) (-0.96) Ln(Population) -0.0266 0.0502 -0.0782 0.0894* 0.0991* 0.102** (-0.45) (0.83) (-1.16) (1.77) (1.92) (2.06) Constant Yes Yes Yes Yes Yes Yes Year dummies Yes Yes Yes Yes Yes Yes State dummies Yes Yes Yes Yes Yes Yes Adjusted R-squared 0.359 0.359 0.359 0.358 0.358 0.358 Observations 84111 81871 81871 84111 84111 84111

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