This paper investigates the relationship between housing wealth and heterogeneity in environmental regulatory enforcement and pollution levels across U.S. counties. Leveraging an instrumental variables approach, results indicate that enforcement actions under the Clean Air Act exhibit a statistically significant positive correlation with median housing values at the county level. This effect is amplified within counties characterized by elevated levels of social capital, as well as those located in states administered by Democratic Party governors. Exogenous increases in local house prices precipitate a decline in toxic emissions from local polluting facilities alongside a simultaneous rise in pollution abatement initiatives undertaken by said plants. Collectively, these findings underscore how localized environmental regulatory enforcement can become fragmented under a federalist system when household marginal willingness-to-pay for environmental quality is non-uniform. Overall, the analysis provides empirical evidence that housing wealth constitutes an impactful predictor of disparities in environmental regulatory stringency across the U.S.

Conferences:  MFA (2024) (Scheduled), Emory University (2023)

This paper investigates the relationship between asset prices and the interest rate risk exposures of commercial banks, who serve as prominent institutional investors in the $4 trillion municipal bond market. Banks with extensive local branch networks effectively function as marginal investors, incorporating their own interest rate risk exposure into the offering yields of locally issued bonds. The pricing of interest rate risk demonstrates significant intertemporal heterogeneity depending on the prevailing level of the Federal Funds rate, with heightened sensitivity during periods of higher fed funds rates. The sensitivity of yields to banks' interest rate risk is lower, when banks have higher market power in deposit markets. Interestingly, while interest rate risk exposures are materially priced into offering yields, the same does not hold for risks stemming from banks' liquidity positions. The results highlight how the risk-bearing capacities and preferences of financial intermediaries have a material impact on asset pricing outcomes in the presence of market segmentation and imperfect competition. This has implications for issuers seeking the lowest funding costs in a complex, fragmented bond market.

Presented At:  Pennsylvania State University (2023), University of Miami (2023), Fordham University (2023), Emory University (2022), Systematic and Factor Fixed Income Invesco Ltd. (2023), FMCG Conference (2023)

Public mass shootings raise borrowing costs of issuers in affected counties by an average of six (five) basis points in the secondary (primary) market. This increase in tax-adjusted yield spreads is not driven by any material change in the issuers' fundamentals, nor by an increase in illiquidity, risk aversion, or excess supply of debt. In contrast, there is no evidence that the violent crime rate in the county is priced into yield spreads. A possible explanation is investors' biased expectations of fundamentals brought about by media driven salience.

Conferences:  UTS (2023)*, ABFER (2022)*, AREUEA International Conference (2022)*, Deakin University (2022)*, Emory University (2022), Monash University (2022)*, UT San Antonio (2022)*,  Chapman University's Finance Conference (2022)*

* denotes presentation by coauthor


4. Bias in the Bond Market: Racial Salience and Municipal Debt After Mayoral Elections

This paper analyzes the effect of electing a black mayor on the financing cost of local government debt. Using a diff-in-diff design around close elections to address the endogeneity of black leadership, we examine all black-white contested mayoral elections across U.S. cities during 1995-2020. We find that tax-adjusted yield spreads of municipal bonds issued in counties where black mayors won narrowly, rise by about 10 basis points relative to the sample of counties where white mayors won by a narrow margin. This race effect is more pronounced for first time black mayoral victories, for counties with high financial distress risk before elections, and in states with stronger racial bias. Primary market borrowing costs too go up for black-mayoral counties, although a part of this effect is explained by the change in the choice of underwriters post elections. In contrast to the effects on bond prices, there is little to no change in local governments’ ex-post fiscal outcomes, and the inauguration of a black mayor leads to policies that are indistinguishable from cities where black mayors do not govern. The results suggest a disconnect between the post-election bond yield spreads and the fiscal outcomes that follow, thus pointing to the role of investors’ biased beliefs brought about by racial salience.