Do Municipalities Pay More to Issue Unrated Bonds?

Abstract

We study the approximately 34% of local municipal bond issues that are unrated. Results show that issuers are less likely to obtain ratings for smaller issues, negotiated offerings, and bonds with high proxies for risk such as coming from areas with low property values and personal income. Using a doubly-robust Inverse Probability Weighted Regression Adjustment that controls for the endogenous choice to obtain a rating, we estimate forgoing a rating causes higher offering yields of between 36 and 55 basis points, costing municipalities $17B to $26B in higher interest expense between 1998 and 2017.