Three Essays in Financial Economics Public
Jeung, Jinoug (Spring 2023)
Published
Abstract
This dissertation investigates how financial market participants react to socioeconomic changes and how their reactions affect the real economy. In the first essay, I study whether political values shape depositor behavior. Specifically, I examine how depositors respond when they do not agree with their banks’ political stances by focusing on divergent political beliefs regarding gun policy, one of the most politically divisive issues in the US. Exploiting a shock drawing public attention to banks’ financial relationships with the gun industry, I find that banks that lend to the gun industry experience significant decreases in deposit growth. The effect is stronger in counties with more Democrats or higher support for gun control. Anti-gun depositor movements increase funding costs for gun-lending banks and thus reduce their lending business, which coincides with slower growth in gun establishments. I also find evidence that banks with public anti-gun policies experience reduced deposit growth, specifically in counties with more Republicans or higher support for gun rights. The findings suggest that conflicting political values between banks and depositors lead to depositor movements and pose financial risks to bank operations.
In the second essay, co-authored with Tarun Chordia and Abinash Pati, we document that public mass shootings raise borrowing costs of municipal bond issuers in affected counties. This increase is not driven by any material changes in the issuers’ fundamentals or 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 borrowing costs of municipal bond issuers there. A possible explanation is investors’ biased expectations of fundamentals brought about by media-driven salience.
In the third essay, co-authored with Jaemin Lee, we investigate how social connection affects municipal finance. We find that municipal bond mutual funds allocate more capital to counties with stronger social connections, which in turn lowers the municipalities’ financing costs in the municipal bond market. Consistent with the familiarity-driven demand channel, the effects are focused on mutual funds with lower institutional resources and opaque bonds facing higher uncertainty. We find no effect for bank-qualified bonds, which mutual funds rarely hold. Fundamental risks, underwriter effects, and large counties with national-level awareness do not drive the results. Overall, we provide a new channel based on social connection that explains the cross-section of municipal bond prices.
Table of Contents
Politically Polarized Depositors ....................................................................................................1
Introduction ..................................................................................................................................2
Data and Variables........................................................................................................................7
Bank-branch-year deposit growth sample ................................................................................7
Bank-branch-quarter deposit spread sample ............................................................................8
County-year firearms business sample.....................................................................................8
Gun lenders and anti-gun banks ...............................................................................................9
Political values of depositors..................................................................................................10
Political leanings of gun lenders.............................................................................................11
Additional variables................................................................................................................11
Summary Statistics.....................................................................................................................12
Empirical Methodologies and Results........................................................................................14
Anti-gun depositor movements ..............................................................................................14
Politically polarized movements ............................................................................................16
Political values of depositors .............................................................................................16
Political leanings of gun lenders ........................................................................................17
Cross-sectional tests ...............................................................................................................18
Switching cost....................................................................................................................18
Public attitude towards gun control ...................................................................................19
Social movement engagement ...........................................................................................19
Social proximity to Parkland .............................................................................................20
Pro-gun depositor movements................................................................................................21
Implications of Anti-gun Depositor Movements........................................................................22
Deposit market........................................................................................................................22
Gun industry ...........................................................................................................................24
Conclusion..................................................................................................................................25
Appendix ....................................................................................................................................27
Biased Expectations and Default Risk in the Municipal Bond Market ..................................29
Introduction ................................................................................................................................30
Related Literature.......................................................................................................................36
Data and Summary Statistics......................................................................................................38
Mass shootings .......................................................................................................................38
Identification strategy ........................................................................................................39
Municipal bonds .....................................................................................................................41
Local government finances, county demographic and crime data .........................................45
Mass Shootings and Local Government Borrowing Costs ........................................................46
Main Results...........................................................................................................................47
Understanding the yield spread dynamics in the secondary market ..................................50
Cross-sectional tests ...............................................................................................................51
Bank-qualified bonds .........................................................................................................53
Institutional ownership.......................................................................................................54
Does an Increase in Credit Risk explain the results? .................................................................55
Effect on bond yields by issuer type.......................................................................................56
Impact on local government finances.....................................................................................57
Impact on local economic conditions .....................................................................................59
Impact on credit ratings ..........................................................................................................61
Saliency and biased expectations of default risk ....................................................................62
Media coverage of mass shootings ....................................................................................62
Violent crime rate...............................................................................................................64
Other Potential Explanations......................................................................................................65
Risk aversion ..........................................................................................................................65
Issuance volume .....................................................................................................................66
Discussion of Results .................................................................................................................67
Conclusion..................................................................................................................................69
Social Connection and Financing Cost of Municipal Governments .......................................71
Introduction ................................................................................................................................72
Data ............................................................................................................................................78
Social Connectedness Index ...................................................................................................78
Municipal Bond Mutual Funds (MBMFs) data......................................................................80
Municipal bonds data .............................................................................................................82
Social Connectedness and Municipal Bond Holdings of Mutual Funds....................................83
Baseline specification.............................................................................................................83
Heterogeneity analysis............................................................................................................86
Panel data analysis..................................................................................................................88
Capital Market Implication for Municipalities...........................................................................89
Measurement: social proximity to capital ..............................................................................89
Social proximity and municipal financing cost ......................................................................94
Heterogeneity analysis............................................................................................................95
Alternative channels ...............................................................................................................96
Information advantage versus familiarity...............................................................................98
Social proximity and search cost............................................................................................99
Conclusion................................................................................................................................100
Appendix ..................................................................................................................................101
Appendices..................................................................................................................................103
Tables........................................................................................................................................103
Figures ......................................................................................................................................161
References ...................................................................................................................................171
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