Management Capacity and State Municipal Bond Ratings Evidence With the GPP Grades

• Published in: American review of public administration Vol. 41; no. 5; pp. 562 - 576
• Main Authors: Zhao, Zhirong (Jerry), Guo, Hai (David)
• Format: Journal Article
• Language: English
• Published: Los Angeles, CA SAGE Publications 01.09.2011; SAGE PUBLICATIONS, INC
• Subjects: Bond ratings; Bonding; Bonds; Credit; Debt management; Determinants; Governments; Management; Marketing; Markets; Money; Municipal bonds; Nonlinearity; Obligation; Obligations; Public Administration; Public finance; Quality; Rating; Ratings; Ratings & rankings; State government; Studies; United States > US; government performance project; public management; debt management
• ISSN: 0275-0740; 1552-3357
• DOI: 10.1177/0275074010384718

Most state governments issue general obligation (GO) bonds in the financial market to borrow money. Assigned by credit agencies, state GO bond ratings reflect states’ perceived credit quality and affect their borrowing costs. Despite many studies on the determinants of municipal bond ratings, little has been known about the association between state management capacity and bond ratings because management capacity is generally difficult to quantify. However, state governments’ performance grades assigned by the Government Performance Project (GPP) provide a great opportunity to study how people perceive and respond to state governments’ management capacity. This study finds that states with higher GPP grades tend to have higher state GO bond ratings, but the relationship may be nonlinear as people are more sensitive to the extremes of perceived performance. In particular, we observe a “performance premium” scenario in which S&P bond ratings grow at an increasing rate as state GPP grades improve.