1. The Financial Effects of the Sovereign Ceiling Rule
1.7. Appendix
Figure 1: Frequency of Muni Issuers Downgrades Around the Sovereign Downgrade Conditional on Credit Rating
This figure shows the frequency of issuers that suffer a downgrade from S&P around the sovereign downgrade. Each frequency is conditioned by the issuer’s credit rating prior to the sovereign downgrade. An issuer is considered downgraded when the credit rating from the last issue made prior to the sovereign downgrade is higher than the credit rating of the first issue made afterwards.
40 Figure 2: Number of Daily Trades per Bond
This figure relates the number of outstanding bonds with the number of days with trades.
Are considered all outstanding uninsured bonds from issuers that were able to make investment grade issues. Figure 2A (2B) conditions the sample in the 30 days prior (post) sovereign downgrade. The sample description is detailed in Section 2.2.
Figure 2A Figure 2B
41
Figure 3: Returns on Outstanding Muni Bonds Around the Sovereign Downgrade This figure shows the evolution of the spread between returns of outstanding bonds from treated and control issuers. Each bond’s return was computed by the change in price for the respective window. For both treatment and control groups were created equally weighted portfolios, with the constitution of each portfolio kept constant (by requiring each bond to have at least one monthly trade for the 3-month trade around the event).
42
Figure 4: Yields and Spreads on Outstanding Muni Bonds Around the Sovereign Downgrade
This figure shows the evolution of the average monthly yield in the municipal bond markets from treated and control issuers (Figure 4A), and their respective spread (Figure 4B), 6 months around the sovereign downgrade. Treated issuers were able to make at least one AAA issue without any kind of insurance in the period pre-sovereign downgrade. Control issuers are similar to treated issuers with the exception that were able issue at least one investment grade bonds below AAA (i.e. from BBB- to AA+) in the pre-sovereign downgrade period. The average yield was computed through an OLS regression with the market yield-to-maturity as the dependent variable, a set of dummies to account for each respective month and type of issuer (treated or control) and a set of fixed effects regarding bond’s specific characteristics. The vertical line between T-1 and T+1 months represent the event occurrence.
Figure 4A Figure 4B
43
Figure 5: Offer Yields and Spreads on New Issues Around the Sovereign Downgrade
This figure shows the evolution of the average quarterly offer yield in the municipal bond markets from treated and control issuers (Figure 5A), and their respective spread (Figure 5B), one year around the sovereign downgrade. Treated issuers were able to make at least one AAA issue without any kind of insurance in the period pre-sovereign downgrade.
Control issuers are similar to treated issuers with the exception that were able issue at least one investment grade bonds below AAA (i.e. from BBB- to AA+) in the pre-sovereign downgrade period. The average yield was computed through an OLS regression with the variable offer yield as the dependent variable, a set of dummies to account for each respective quarter and type of issuer (treated or control), bond characteristics: natural logarithm of the amount issued, maturity, coupon, bond type, tax exemption regime; and issuer characteristics: size, liquidity and state. The vertical line between T-1 and T+1 quarters represent the event occurrence.
Figure 5A Figure 5B
44
Figure 6: Amounts Issued of Muni Bonds Around the Sovereign Downgrade This figure shows the natural logarithm of the total amount issued per quarters for both treated and control issuers one year around the sovereign downgrade. Treated issuers were able to make at least one AAA issue without any kind of insurance in the period pre-sovereign downgrade. Control issuers are similar entities with the exception that were able issue at least one investment grade bonds below AAA (i.e. from BBB- to AA+) in the pre-sovereign downgrade period.
45
Table 1: Summary Statistics – Secondary Market
This table presents the summary statistics for the data used in the parametric tests for the secondary market. Each period pre and post sovereign downgrade includes one observation. The pre-downgrade period corresponds to the third month prior to the event and considers the first observation in that period. For the post-sovereign period are considered the first, third and sixth month after the event and it is considered the last observation in each period. yield is the last daily yield-to-maturity. spread represents the difference between the issue last daily yield-to-maturity and the treasury with the closest maturity. ln(trade volume) represents the natural logarithm of the average daily trade volume. bonds outstanding represent the number of number of outstanding issues for each issuer. More details regarding the variables are contained in Table A.1 in the Internet Appendix. Panel A splits the sample between treated issuers and control issuers, while Panel B splits between the period pre and post sovereign downgrade.
46
Panel A: Split by treated and control Control issuers Number of
issuers yield spread ln(trade volume) bonds outstanding
Mean (T-3M; T+1M) 526 3.77 1.05 11.03 201.63
Mean (T-3M; T+3M) 501 3.78 1.06 10.96 213.13
Mean (T-3M; T+6M) 512 3.52 0.80 11.01 212.46
SD (T-3M; T+1M) 526 1.65 1.65 1.75 349.48
SD (T-3M; T+3M) 501 1.66 1.65 1.70 366.80
SD (T-3M; T+6M) 512 1.69 1.69 1.67 365.05
Min (T-3M; T+1M) 526 0.00 -2.72 8.52 1.00
Min (T-3M; T+3M) 501 0.00 -2.72 8.52 1.00
Min (T-3M; T+6M) 512 0.00 -2.72 8.52 1.00
p25 (T-3M; T+1M) 526 2.63 -0.09 9.90 25.00
p25 (T-3M; T+3M) 501 2.62 -0.10 9.90 25.00
p25 (T-3M; T+6M) 512 2.25 -0.47 9.90 25.00
p50 (T-3M; T+1M) 526 3.70 0.98 10.60 72.00
p50 (T-3M; T+3M) 501 3.70 0.98 10.53 76.00
p50 (T-3M; T+6M) 512 3.34 0.62 10.65 74.00
p75 (T-3M; T+1M) 526 4.77 2.05 11.92 179.00
p75 (T-3M; T+3M) 501 4.85 2.12 11.81 205.00
p75 (T-3M; T+6M) 512 4.60 1.88 11.92 187.50
Max (T-3M; T+1M) 526 9.13 6.41 17.37 1,989.00
Max (T-3M; T+3M) 501 9.10 6.38 17.82 1,997.00
Max (T-3M; T+6M) 512 9.10 6.38 17.37 1,989.00
Treated issuers
Mean (T-3M; T+1M) 81 2.70 -0.02 11.37 446.91
Mean (T-3M; T+3M) 80 2.79 0.07 11.29 501.16
Mean (T-3M; T+6M) 75 2.56 -0.16 11.26 506.33
SD (T-3M; T+1M) 81 1.31 1.31 1.80 486.15
SD (T-3M; T+3M) 80 1.23 1.22 1.80 539.48
SD (T-3M; T+6M) 75 1.31 1.31 1.76 539.38
Min (T-3M; T+1M) 81 0.24 -2.48 8.52 5.00
Min (T-3M; T+3M) 80 0.30 -2.42 8.52 5.00
Min (T-3M; T+6M) 75 0.13 -2.59 8.52 10.00
p25 (T-3M; T+1M) 81 1.65 -1.07 10.13 101.00
p25 (T-3M; T+3M) 80 1.88 -0.84 10.13 107.00
p25 (T-3M; T+6M) 75 1.54 -1.18 10.13 107.00
p50 (T-3M; T+1M) 81 2.69 -0.03 10.91 225.00
p50 (T-3M; T+3M) 80 2.78 0.04 10.82 242.00
p50 (T-3M; T+6M) 75 2.48 -0.25 10.82 242.00
p75 (T-3M; T+1M) 81 3.72 1.00 12.43 792.00
p75 (T-3M; T+3M) 80 3.67 0.96 12.36 829.00
p75 (T-3M; T+6M) 75 3.49 0.77 12.41 874.00
Max (T-3M; T+1M) 81 6.65 3.93 17.23 1,962.00
Max (T-3M; T+3M) 80 6.65 3.93 17.23 2,053.00
Max (T-3M; T+6M) 75 6.70 3.98 17.23 2,070.00
47
Panel B: Split by period pre or post sovereign downgrade Pre-sovereign downgrade Number
of issues yield spread ln(trade volume) bonds outstanding
Mean (T-3M; T+1M) 1,816 3.78 1.06 11.44 247.89
Mean (T-3M; T+3M) 1,663 3.81 1.09 11.41 266.61
Mean (T-3M; T+6M) 1,796 3.89 1.17 11.38 257.22
SD (T-3M; T+1M) 1,816 1.65 1.65 1.86 391.62
SD (T-3M; T+3M) 1,663 1.70 1.70 1.85 417.91
SD (T-3M; T+6M) 1,796 1.65 1.65 1.79 410.10
Min (T-3M; T+1M) 1,816 0.00 -2.72 8.52 1.00
Min (T-3M; T+3M) 1,663 0.00 -2.72 8.52 1.00
Min (T-3M; T+6M) 1,796 0.00 -2.72 8.52 1.00
p25 (T-3M; T+1M) 1,816 2.63 -0.09 10.13 28.00
p25 (T-3M; T+3M) 1,663 2.62 -0.10 10.13 28.00
p25 (T-3M; T+6M) 1,796 2.76 0.04 10.13 27.00
p50 (T-3M; T+1M) 1,816 3.75 1.03 11.00 95.00
p50 (T-3M; T+3M) 1,663 3.73 1.01 10.89 95.00
p50 (T-3M; T+6M) 1,796 3.82 1.10 10.89 93.00
p75 (T-3M; T+1M) 1,816 4.79 2.07 12.61 253.00
p75 (T-3M; T+3M) 1,663 4.92 2.20 12.56 295.00
p75 (T-3M; T+6M) 1,796 4.90 2.18 12.53 259.00
Max (T-3M; T+1M) 1,816 9.10 6.38 17.37 1,989.00
Max (T-3M; T+3M) 1,663 9.10 6.38 17.37 1,989.00
Max (T-3M; T+6M) 1,796 9.10 6.38 17.37 1,989.00
Post-sovereign downgrade
Mean (T-3M; T+1M) 1,816 3.31 0.59 10.76 257.21
Mean (T-3M; T+3M) 1,663 3.32 0.60 10.65 284.35
Mean (T-3M; T+6M) 1,796 2.77 0.05 10.74 282.24
SD (T-3M; T+1M) 1,816 1.60 1.60 1.59 397.56
SD (T-3M; T+3M) 1,663 1.50 1.50 1.50 436.06
SD (T-3M; T+6M) 1,796 1.49 1.49 1.52 431.90
Min (T-3M; T+1M) 1,816 0.00 -2.72 8.52 1.00
Min (T-3M; T+3M) 1,663 0.00 -2.72 8.52 1.00
Min (T-3M; T+6M) 1,796 0.00 -2.72 8.52 1.00
p25 (T-3M; T+1M) 1,816 2.20 -0.52 9.62 36.00
p25 (T-3M; T+3M) 1,663 2.28 -0.44 9.62 36.00
p25 (T-3M; T+6M) 1,796 1.67 -1.05 9.77 35.00
p50 (T-3M; T+1M) 1,816 3.24 0.52 10.31 99.00
p50 (T-3M; T+3M) 1,663 3.23 0.52 10.13 107.00
p50 (T-3M; T+6M) 1,796 2.55 -0.17 10.31 106.00
p75 (T-3M; T+1M) 1,816 4.25 1.54 11.51 257.00
p75 (T-3M; T+3M) 1,663 4.19 1.47 11.41 313.00
p75 (T-3M; T+6M) 1,796 3.61 0.89 11.51 289.00
Max (T-3M; T+1M) 1,816 9.13 6.41 17.31 1,975.00
Max (T-3M; T+3M) 1,663 8.39 5.66 17.82 2,053.00
Max (T-3M; T+6M) 1,796 7.85 5.13 16.52 2,070.00
48 Table 2: Summary Statistics – Primary Market
This table presents the summary statistics for the data set used in the parametric tests for the primary market and considers one year around the sovereign downgrade. yield represents the new issue offer yield. spread represents the difference between the new issue offer yield and the treasury with the closest maturity. Rating is a numeric transformation of S&P long term rating scale that is increasing in the credit quality (AAA=22, AA+=21, AA=20,…, C=1). ln(par) is the natural logarithm of the par value issued (measured in $ millions). Maturity is the number of days left to reach the contractual maturity. Coupon is the new issue coupon rate in percentage. GO is a binary variable that take the value of 1 if the issue is of General Obligation type and 0 otherwise.
R is a binary variable that take the value of 1 if the issue is Revenue type and 0 otherwise.
State tax exemption is a binary variable that takes the value of 1 if the issue is tax exempt at the state level and 0 otherwise. Federal tax exemption is a binary variable that takes the value of 1 if the issue is tax exempt at the federal level and 0 otherwise. Bonds Outstanding is the number of number of outstanding issues for each issuer immediately prior to the respective new issue. More details regarding the variables are contained in Table A.1 in the Internet Appendix. Panel A splits the sample between treated and control issuers, while Panel B splits between the period pre and post sovereign downgrade.
49
Panel A: Split by treated and control
yield spread Rating ln(par) Maturity Coupon GO R
State tax exemption
Federal tax exemption
bonds Outstanding (57,707 new issues from non-AAA issuers)
Mean 2.74 0.60 19.14 3.05 9.14 3.50 0.54 0.39 0.72 0.10 153.40
SD 1.47 0.80 1.62 1.67 6.15 1.35 0.50 0.49 0.45 0.30 291.11
Min 0.10 -3.32 13.00 -3.69 0.00 0.00 0.00 0.00 0.00 0.00 0.00
p25 1.59 0.11 18.00 1.77 4.00 2.50 0.00 0.00 0.00 0.00 11.00
p50 2.65 0.45 19.00 2.89 8.00 3.50 1.00 0.00 1.00 0.00 48.00
p75 3.67 0.92 20.00 4.32 13.00 4.75 1.00 1.00 1.00 0.00 161.00
Max 10.00 8.04 22.00 8.22 100.00 9.50 1.00 1.00 1.00 1.00 2,250.00
(12,057 new issues from AAA issuers)
Mean 2.32 0.23 21.51 3.82 9.26 3.58 0.50 0.48 0.78 0.07 432.13
SD 1.26 0.59 1.17 1.50 6.01 1.20 0.50 0.50 0.41 0.26 528.10
Min 0.09 -3.40 13.00 -1.29 0.00 0.00 0.00 0.00 0.00 0.00 0.00
p25 1.25 -0.11 22.00 2.69 5.00 3.00 0.00 0.00 1.00 0.00 101.00
p50 2.30 0.18 22.00 3.88 8.00 4.00 0.00 0.00 1.00 0.00 233.00
p75 3.25 0.52 22.00 4.91 13.00 5.00 1.00 1.00 1.00 0.00 513.00
Max 7.30 4.05 22.00 7.50 42.00 7.13 1.00 1.00 1.00 1.00 2,513.00
50
Panel B: Split by period pre and post sovereign downgrade
yield spread Rating ln(par) Maturity Coupon GO R
State tax exemption
Federal tax exemption
bonds Outstanding (44,416 new issues prior the sovereign downgrade)
Mean 2.95 0.60 19.35 2.93 9.14 3.57 0.55 0.38 0.73 0.11 154.08
SD 1.53 0.84 1.83 1.61 6.20 1.36 0.50 0.49 0.44 0.31 329.63
Min 0.09 -2.72 13.00 -3.69 0.00 0.00 0.00 0.00 0.00 0.00 0.00
p25 1.75 0.06 18.00 1.73 4.00 2.70 0.00 0.00 0.00 0.00 0.00
p50 2.90 0.42 20.00 2.77 8.00 3.75 1.00 0.00 1.00 0.00 39.00
p75 3.95 0.91 21.00 4.06 13.00 4.75 1.00 1.00 1.00 0.00 131.00
Max 10.00 7.11 22.00 8.22 43.00 9.50 1.00 1.00 1.00 1.00 2,513.00
(25,348 new issues after the sovereign downgrade)
Mean 2.18 0.42 19.90 3.64 9.19 3.42 0.51 0.46 0.74 0.07 284.80
SD 1.14 0.66 1.66 1.67 6.00 1.27 0.50 0.50 0.44 0.25 393.55
Min 0.10 -3.40 13.00 -1.99 0.00 0.00 0.00 0.00 0.00 0.00 0.00
p25 1.20 0.08 19.00 2.30 5.00 2.25 0.00 0.00 0.00 0.00 56.00
p50 2.17 0.38 20.00 3.66 8.00 3.30 1.00 0.00 1.00 0.00 137.00
p75 3.05 0.79 21.00 4.93 13.00 5.00 1.00 1.00 1.00 0.00 321.00
Max 10.00 8.04 22.00 7.78 100.00 8.00 1.00 1.00 1.00 1.00 2,391.00
51
Table 3: Change in Credit Ratings of Municipal Issuers Around the Sovereign Downgrade
This table presents the distribution of issuers between upgraded and downgraded issuers (Panel A) as well as the magnitude of downgrades (Panel B). Panel A shows the distribution of issuers that suffered a downgrade, no change or upgrade in their credit rating around the sovereign downgrade, conditional on the credit rating prior to the sovereign downgrade. Panel B shows the issuer’s downgrade magnitude in notches, conditional on the credit rating prior to the sovereign downgrade.
Panel A
Rating Downgraded No Change Upgraded Total
AAA 25 176 0 201
AA+ 22 221 3 246
AA 21 462 15 498
AA- 11 504 21 536
A+ 6 415 16 437
A 4 262 13 279
A- 1 109 5 115
BBB+ 0 40 1 41
BBB 0 39 3 42
BBB- 0 20 4 24
Total 90 2,248 81 2,419
Panel B - Downgrades
Rating 1-Notch 2-Notch >= 3-Notch
AAA 56.0% 12.0% 32.0%
AA+ 72.7% 13.6% 13.6%
AA 76.2% 4.8% 19.0%
AA- 72.7% 27.3% 0.0%
A+ 83.3% 0.0% 16.7%
A 75.0% 0.0% 25.0%
A- 100.0% 0.0% 0.0%
Total 70.0% 11.1% 18.9%
52
Table 4: Ex-Post Returns of Treated and Control Issuers Around the Sovereign Downgrade
This table displays the returns on equal weighted portfolios according to the issuer’s credit rating prior to the sovereign downgrade. Each individual return is measured by the bond’s price change, using the first price in the pre sovereign downgrade period and the last price in the post sovereign downgrade period. *, ** and *** represent significance levels of 10%, 5% and 1%, respectively.
Ex-Post Returns Spread
Treated Control AA “Treated – Control” “AAA –AA”
T-3M; T+1M 3.7323*** 4.6365*** 4.4633*** -0.90 -0.73 (0.2878) (0.1911) (0.2519)
T-2M; T+1M 2.5156*** 2.8003*** 2.7223*** -0.28 -0.21 (0.2460) (0.1563) (0.1954)
T-1M; T+1M 2.3774*** 2.7552*** 2.8231*** -0.38 -0.45 (0.2273) (0.1439) (0.1767)
T-1M; T+2M 2.5168*** 4.3151*** 4.2337*** -1.80 -1.72 (0.3118) (0.2044) (0.2796)
T-1M; T+3M 1.7418*** 3.5764*** 3.2857*** -1.83 -1.54 (0.3042) (0.1919) (0.2592)
Obs 103 400 244
53
Table 5: Impact on Market Yields and Spreads-to-Treasury Around the Sovereign Downgrade
This table presents the impact on market yield-to-maturity and spread-to-treasury around the sovereign downgrade. The yield is the market yield-to-maturity. The spread is the difference between the yield-to-maturity and the treasury with the closest maturity.
∆𝑦𝑖𝑒𝑙𝑑 and ∆𝑠𝑝𝑟𝑒𝑎𝑑 compute the difference between each period around the sovereign downgrade. 𝑡𝑟𝑒𝑎𝑡𝑒𝑑 is a binary variable that identifies treated issuers (issuers that were able to attain at least one AAA rating in the last issue prior to the sovereign downgrade).
∆𝑟𝑎𝑡𝑖𝑛𝑔 is the issuer’ change in credit rating between the last issue made prior to the sovereign downgrade and the first issue afterwards, measured in notches. The covariates used are described in Table A.1 in the Internet Appendix. Standard errors are clustered at the issuer level and reported in parentheses. ***, **, * indicates significance at 1%, 5% and 10% level respectively.
54
Panel A: OLS estimation
T-3M; T+1M T-3M; T+3M T-3M; T+6M
∆𝑦𝑖𝑒𝑙𝑑 (1)
∆𝑠𝑝𝑟𝑒𝑎𝑑 (2)
∆𝑦𝑖𝑒𝑙𝑑 (3)
∆𝑠𝑝𝑟𝑒𝑎𝑑 (4)
∆𝑦𝑖𝑒𝑙𝑑 (5)
∆𝑠𝑝𝑟𝑒𝑎𝑑 (6)
𝑡𝑟𝑒𝑎𝑡𝑒𝑑 0.03 0.03 0.05** 0.05** 0.10*** 0.11***
(0.02) (0.02) (0.03) (0.03) (0.03) (0.03)
∆𝑙𝑛(𝑡𝑟𝑎𝑑𝑒 𝑣𝑜𝑙𝑢𝑚𝑒) -0.04*** -0.04*** -0.03*** -0.03*** -0.04*** -0.04***
(0.00) (0.00) (0.01) (0.01) (0.01) (0.01)
𝐶𝑜𝑛𝑠𝑡𝑎𝑛𝑡 -0.50*** -0.50*** -0.52*** -0.52*** -1.18*** -1.19***
(0.02) (0.02) (0.02) (0.02) (0.02) (0.02)
Obs 1,816 1,816 1,663 1,663 1,796 1,796
Adjusted R2 0.05 0.05 0.10 0.09 0.07 0.07
SE Robust Robust Robust Robust Robust Robust
Issuer gov. Level
FE Yes Yes Yes Yes Yes Yes
Issuer State FE Yes Yes Yes Yes Yes Yes
55
Panel B: 2SLS estimation
T-3M; T+1M T-3M; T+3M T-3M; T+6M
∆𝑦𝑖𝑒𝑙𝑑 (1)
∆𝑠𝑝𝑟𝑒𝑎𝑑 (2)
∆𝑦𝑖𝑒𝑙𝑑 (3)
∆𝑠𝑝𝑟𝑒𝑎𝑑 (4)
∆𝑦𝑖𝑒𝑙𝑑 (5)
∆𝑠𝑝𝑟𝑒𝑎𝑑 (6)
∆𝑟𝑎𝑡𝑖𝑛𝑔̂ -0.04 -0.04 -0.07** -0.07** -0.15*** -0.15***
(0.03) (0.03) (0.03) (0.03) (0.04) (0.04)
∆𝑙𝑛(𝑡𝑟𝑎𝑑𝑒 𝑣𝑜𝑙𝑢𝑚𝑒) -0.04*** -0.04*** -0.03*** -0.03*** -0.04*** -0.04***
(0.00) (0.00) (0.01) (0.01) (0.01) (0.01)
𝐶𝑜𝑛𝑠𝑡𝑎𝑛𝑡 -0.50*** -0.50*** -0.52*** -0.52*** -1.17*** -1.18***
(0.02) (0.02) (0.02) (0.02) (0.02) (0.02)
Obs 1,816 1,816 1,663 1,663 1,796 1,796
Adjusted R2 0.05 0.05 0.05 0.05 0.07 0.07
SE Robust Robust Robust Robust Robust Robust
Issuer gov. Level
FE Yes Yes Yes Yes Yes Yes
Issuer State FE Yes Yes Yes Yes Yes Yes
56
Table 6: Impact on Trade Volume Around the Sovereign Downgrade
This table presents the impact on trade volume around the sovereign. The dependent variable ∆𝑙𝑛(𝑡𝑟𝑎𝑑𝑒 𝑣𝑜𝑙𝑢𝑚𝑒) is the change of the natural logarithm of the amount in dollars traded around the event. 𝑡𝑟𝑒𝑎𝑡𝑒𝑑 is a binary variable that identifies treated issuers (issuers that were able to attain at least one AAA rating in the last issue prior to the sovereign downgrade). ∆𝑟𝑎𝑡𝑖𝑛𝑔 is the issuer change in credit rating between the last issue made prior to the sovereign downgrade and the first issue afterwards, measured in notches. The covariates used are described in Table A.1 in the Internet Appendix.
Standard errors are clustered at the issuer level and reported in parentheses. ***, **, * indicates significance at 1%, 5% and 10% level respectively.
Panel A: OLS estimation - ∆𝒍𝒏(𝒕𝒓𝒂𝒅𝒆 𝒗𝒐𝒍𝒖𝒎𝒆) T-3M; T+1M
(1)
T-3M; T+3M (2)
T-3M; T+6M (3)
𝑡𝑟𝑒𝑎𝑡𝑒𝑑 -0.27** -0.26* -0.30**
(0.13) (014) (0.15)
Adjusted R2 0.02 0.00 0.02
Panel B: 2S LS estimation - ∆𝒍𝒏(𝒕𝒓𝒂𝒅𝒆 𝒗𝒐𝒍𝒖𝒎𝒆)
∆𝑟𝑎𝑡𝑖𝑛𝑔̂ 0.34** 0.33* 0.44**
(0.17) (0.18) (0.21)
Adjusted R2 0.02 0.00 0.02
Obs 1,816 1,663 1,796
SE Robust Robust Robust
Issuer gov. Level
FE Yes Yes Yes
Issuer State FE Yes Yes Yes
57
Table 7: Impact on Trade Volume by Size Around the Sovereign Downgrade This table presents the impact on trade volume around the sovereign by trade size. Trades are separated by size: small trades (< $100,000), associated to retail investors, and big trades (≥ $100,000), associated with institutional investors. The dependent variable
∆𝑙𝑛(𝑡𝑟𝑎𝑑𝑒 𝑣𝑜𝑙𝑢𝑚𝑒) is the change of the natural logarithm of the amount traded around the event. 𝑡𝑟𝑒𝑎𝑡𝑒𝑑 is a binary variable that identifies treated issuers (issuers that were able to attain at least one AAA rating in the last issue prior to the sovereign downgrade).
∆𝑟𝑎𝑡𝑖𝑛𝑔 is the issuer’ change in credit rating between the last issue made prior to the sovereign downgrade and the first issue afterwards, measured in notches. The covariates used are described in Table A.1 in the Internet Appendix. Standard errors are clustered at the issuer level and reported in parentheses. ***, **, * indicates significance at 1%, 5% and 10% level respectively.
Panel A: OLS estimation - ∆𝒍𝒏(𝒕𝒓𝒂𝒅𝒆 𝒗𝒐𝒍𝒖𝒎𝒆)
Trades < $𝟏𝟎𝟎, 𝟎𝟎𝟎 Trades ≥ $𝟏𝟎𝟎, 𝟎𝟎𝟎
T-3M; T+1M (1)
T-3M; T+3M (2)
T-3M; T+6M (3)
T-3M; T+1M (4)
T-3M; T+3M (5)
T-3M; T+6M (6)
𝑡𝑟𝑒𝑎𝑡𝑒𝑑 0.11** 0.14* -0.07 -0.66*** -0.23 -0.18
(0.08) (0.08) (0.08) (0.19) (0.20) (0.20)
Adjusted R2 -0.00 -0.00 -0.01 0.06 0.03 0.01
Panel B: 2S LS estimation - ∆𝒍𝒏(𝒕𝒓𝒂𝒅𝒆 𝒗𝒐𝒍𝒖𝒎𝒆)
∆𝑟𝑎𝑡𝑖𝑛𝑔̂ -0.12 -0.16* 0.09 0.70*** 0.25 0.30
(0.09) (0.09) (0.10) (0.20) (0.22) (0.33)
Adjusted R2 -0.00 -0.00 -0.01 0.06 0.03 0.01
Obs 1,172 1,105 1,221 560 470 504
SE Robust Robust Robust Robust Robust Robust
Issuer gov.
Level FE Yes Yes Yes Yes Yes Yes
Issuer State FE Yes Yes Yes Yes Yes Yes
58
Table 8: Impact on Yields and Spreads-to-Treasury From New Issues Around the Sovereign Downgrade
This table presents the impact on offer yield and spread-to-treasury one-year around the sovereign downgrade. spread is the difference between the offer yield and the treasury with the closest maturity. treated is a binary variable that identifies treated issuers (issuers that were able to attain at least one AAA issue in the year prior to the sovereign downgrade). ∆𝑟𝑎𝑡𝑖𝑛𝑔 is the issuer’ change in credit rating between the last issue made prior to the sovereign downgrade and the first issue afterwards, measured in notches.
𝑝𝑜𝑠𝑡𝑑𝑜𝑤𝑛 is a binary variable that takes the value of 1 if the issue occurred in the period post sovereign downgrade and 0 otherwise. The covariates used are described in Table A.1 in the Internet Appendix. Standard errors are clustered at the issuer level and reported in parentheses. ***, **, * indicates significance at 1%, 5% and 10% level respectively.
59
Panel A: OLS estimation Panel B: 2SLS estimation 𝑦𝑖𝑒𝑙𝑑
(1)
𝑠𝑝𝑟𝑒𝑎𝑑 (2)
𝑦𝑖𝑒𝑙𝑑 (3)
𝑠𝑝𝑟𝑒𝑎𝑑 (4) 𝑝𝑜𝑠𝑡𝑑𝑜𝑤𝑛 × 𝑡𝑟𝑒𝑎𝑡𝑒𝑑 0.09*** 0.11***
(0.03) (0.03)
𝑝𝑜𝑠𝑡𝑑𝑜𝑤𝑛 × ∆𝑟𝑎𝑡𝑖𝑛𝑔̂ -0.16*** -0.25***
(0.05) (0.05)
𝑝𝑜𝑠𝑡𝑑𝑜𝑤𝑛 -0.62*** -0.05*** -0.59*** -0.02
(0.02) (0.02) (0.02) (0.02)
𝑡𝑟𝑒𝑎𝑡𝑒𝑑 -0.26*** -0.27***
(0.03) (0.03)
∆𝑟𝑎𝑡𝑖𝑛𝑔̂ 0.43*** 0.47***
(0.05) (0.05)
𝑏𝑜𝑛𝑑𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 0.00 -0.00 -0.00 -0.00**
(0.00) (0.00) (0.00) (0.00)
𝑙𝑛(𝑡𝑟𝑎𝑑𝑒 𝑣𝑜𝑙𝑢𝑚𝑒) -0.07*** -0.04*** -0.08*** -0.05***
(0.01) (0.01) (0.01) (0.01)
𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦 0.17*** 0.01*** 0.17*** 0.01***
(0.00) (0.00) (0.00) (0.00)
𝑐𝑜𝑢𝑝𝑜𝑛 0.17*** 0.03** 0.17*** 0.03**
(0.02) (0.01) (0.02) (0.01)
𝐺𝑂 -0.66*** -0.79*** -0.69*** -0.82***
(0.07) (0.07) (0.07) (0.07)
𝑅 -0.45*** -0.51*** -0.48*** -0.54***
(0.07) (0.07) (0.07) (0.07)
𝑠𝑡𝑎𝑡𝑒 𝑡𝑎𝑥 𝑒𝑥𝑒𝑚𝑝𝑡 0.11* 0.14*** 0.06 0.09*
(0.06) (0.05) (0.06) (0.05)
𝑓𝑒𝑑𝑒𝑟𝑎𝑙 𝑡𝑎𝑥 𝑒𝑥𝑒𝑚𝑝𝑡 0.96*** 1.07*** 0.95*** 1.06***
(0.03) (0.03) (0.03) (0.03)
𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡 1.39*** 0.97*** 1.46*** 1.03***
(0.09) (0.08) (0.09) (0.08)
Obs 69,764 69,764 69,764 69,764
Adjusted R2 0.81 0.40 0.81 0.40
Issuer rating FE Yes Yes Yes Yes
Issuer gov. Level FE Yes Yes Yes Yes
Issuer state Fixed Effects Yes Yes Yes Yes
60
Table 9: Dynamic Effect of the Sovereign Downgrade in the Cost of Debt From New Issues
This table presents the interaction terms of equation (11) that analyze the municipal bond issuers cost of debt, measured by the offer yield and spread-to-treasury, in several different time periods. The variable period takes the value of 1 if the issue was made after the respective period, measured in quarters from the sovereign downgrade, and 0 otherwise. treated is a dummy variable that takes the value of 1 if the issue belongs to the treatment group and 0 otherwise. The covariates used are the same as in Table 8 and are described in Table A.1 in the Internet Appendix. In order to save space it were only reported the interaction terms. Standard errors are clustered at the issuer level and reported in parentheses. ***, **, * indicates significance at 1%, 5% and 10% level respectively.
Panel A: OLS estimation - yield
T − 3Q T − 2Q T − Q T T + Q T + 2Q T + 3Q 𝑝𝑒𝑟𝑖𝑜𝑑𝑇±𝑋𝑄× 𝑡𝑟𝑒𝑎𝑡𝑒𝑑 -0.07 -0.10* -0.01 0.09*** 0.09** 0.10** 0.09*
(0.04) (0.05) (0.04) (0.03) (0.04) (0.04) (0.05) 𝑝𝑒𝑟𝑖𝑜𝑑 0.15*** -0.15*** -0.43*** -0.62*** -0.62*** -0.62*** -0.58***
(0.02) (0.02) (0.02) (0.02) (0.02) (0.02) (0.02)
𝑡𝑟𝑒𝑎𝑡𝑒𝑑
-0.18*** -0.16*** -0.22*** -0.26*** -0.24*** -0.24*** -0.22***
(0.04) (0.05) (0.04) (0.03) (0.03) (0.03) (0.03)
Obs 69,764 69,764 69,764 69,764 69,764 69,764 69,764
Adjusted R2 0.78 0.78 0.80 0.81 0.81 0.80 0.79
Panel B: OLS estimation - spread to treasury
T − 3Q T − 2Q T − Q T T + Q T + 2Q T + 3Q 𝑝𝑒𝑟𝑖𝑜𝑑𝑇±𝑋𝑄× 𝑡𝑟𝑒𝑎𝑡𝑒𝑑 0.02 -0.02 0.06* 0.11*** 0.11*** 0.11*** 0.08
(0.04) (0.04) (0.04) (0.03) (0.04) (0.04) (0.05) 𝑝𝑒𝑟𝑖𝑜𝑑 0.01 -0.12*** -0.10*** -0.05*** -0.13*** -0.18*** -0.05*
(0.02) (0.02) (0.02) (0.02) (0.02) (0.02) (0.03)
𝑡𝑟𝑒𝑎𝑡𝑒𝑑 -0.24 -0.21 -0.26 -0.27 -0.25 -0.25 -0.23
(0.04) (0.04) (0.04) (0.03) (0.03) (0.03) (0.03)
Obs 69,764 69,764 69,764 69,764 69,764 69,764 69,764
Adjusted R2 0.39 0.40 0.40 0.40 0.40 0.40 0.40
61
Table 10: Impact on the Amount Issued per New Issue
This table presents the impact on the amount issued from new issues from the difference-in-differences estimator, one-year period around the sovereign downgrade. The amount issued is defined as the natural logarithm of the amount issued in
$millions in the respective issue. treated is a binary variable that identifies treated issuers (issuers that were able to attain at least one AAA issue in the year prior to the sovereign downgrade). ∆𝑟𝑎𝑡𝑖𝑛𝑔 is the issuer’ change in credit rating between the last issue made prior to the sovereign downgrade and the first issue afterwards, measured in notches. 𝑝𝑜𝑠𝑡𝑑𝑜𝑤𝑛 is a binary variable that takes the value of 1 if the issue occurred in the period post sovereign downgrade and 0 otherwise. The covariates used are described in Table A.1 in the Internet Appendix. Standard errors are clustered at the issuer level and reported in parentheses. ***, **, * indicates significance at 1%, 5% and 10% level respectively.
62
Panel A: OLS estimation Panel B: 2SLS estimation 𝑙𝑛(𝑝𝑎𝑟)
(1)
𝑙𝑛(𝑝𝑎𝑟) (2) 𝑝𝑜𝑠𝑡𝑑𝑜𝑤𝑛 × 𝑡𝑟𝑒𝑎𝑡𝑒𝑑 -0.56***
(0.10)
𝑝𝑜𝑠𝑡𝑑𝑜𝑤𝑛 × ∆𝑟𝑎𝑡𝑖𝑛𝑔̂ 0.57***
(0.18)
𝑝𝑜𝑠𝑡𝑑𝑜𝑤𝑛 0.54*** 0.42***
(0.06) (0.05)
𝑡𝑟𝑒𝑎𝑡𝑒𝑑 0.43***
(0.10)
∆𝑟𝑎𝑡𝑖𝑛𝑔̂ -0.56***
(0.18)
𝑏𝑜𝑛𝑑𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 0.00*** 0.00***
(0.00) (0.00)
𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦 -0.00 -0.00
(0.00) (0.00)
𝑐𝑜𝑢𝑝𝑜𝑛 0.28*** 0.28***
(0.02) (0.02)
𝐺𝑂 0.33*** 0.38***
(0.12) (0.12)
𝑅 1.08*** 1.12***
(0.12) (0.11)
𝑠𝑡𝑎𝑡𝑒 𝑡𝑎𝑥 𝑒𝑥𝑒𝑚𝑝𝑡 0.04 0.09
(0.16) (0.16)
𝑓𝑒𝑑𝑒𝑟𝑎𝑙 𝑡𝑎𝑥 𝑒𝑥𝑒𝑚𝑝𝑡 -0.00 -0.00
(0.06) (0.06)
𝐶𝑜𝑛𝑠𝑡𝑎𝑛𝑡 1.06*** 1.03***
(0.18) (0.17)
Obs 69,764 69,764
Adjusted R2 0.50 0.50
Issuer gov. Level FE Yes Yes
Issuer state Fixed Effects Yes Yes
63
Table 11: Impact on the Total Amount in New Issues per Issuer
This table presents the impact on the amount issued from new issues from the difference-in-differences estimator for one-year period around the sovereign downgrade. The amount issued is defined as the natural logarithm of the total amount issued in $ millions for each period. 𝑡𝑟𝑒𝑎𝑡𝑒𝑑 is a binary variable that identifies treated issuers (issuers that were able to attain at least one AAA issue in the year prior to the sovereign downgrade).
∆𝑟𝑎𝑡𝑖𝑛𝑔 is the issuer’ change in credit rating between the last issue made prior to the sovereign downgrade and the first issue afterwards, measured in notches. 𝑝𝑜𝑠𝑡𝑑𝑜𝑤𝑛 is a binary variable that takes the value of 1 if the issue occurred in the period post sovereign downgrade and 0 otherwise. The covariates used are described in Table A.1 in the Internet Appendix. Standard errors are clustered at the issuer level and reported in parentheses. ***, **, * indicates significance at 1%, 5% and 10% level respectively.
64
Panel A: OLS estimation Panel B: 2SLS estimation 𝑙𝑛(𝑡𝑜𝑡𝑎𝑙 𝑝𝑎𝑟)
(1)
𝑙𝑛(𝑡𝑜𝑡𝑎𝑙 𝑝𝑎𝑟) (2) 𝑝𝑜𝑠𝑡𝑑𝑜𝑤𝑛 × 𝑡𝑟𝑒𝑎𝑡𝑒𝑑 -0.65***
(0.14)
𝑝𝑜𝑠𝑡𝑑𝑜𝑤𝑛 × ∆𝑟𝑎𝑡𝑖𝑛𝑔̂ 0.68**
(0.28)
𝑝𝑜𝑠𝑡𝑑𝑜𝑤𝑛 0.89*** 0.77***
(0.08) (0.07)
𝑡𝑟𝑒𝑎𝑡𝑒𝑑 0.87***
(0.13)
∆𝑟𝑎𝑡𝑖𝑛𝑔̂ -1.31***
(0.22)
𝑏𝑜𝑛𝑑𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 0.00*** 0.00***
(0.00) (0.00)
𝐴𝑣𝑒𝑟𝑎𝑔𝑒(𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦) 0.02 0.03**
(0.01) (0.01)
𝐴𝑣𝑒𝑟𝑎𝑔𝑒(𝑐𝑜𝑢𝑝𝑜𝑛) 0.45*** 0.46***
(0.05) (0.05)
𝐴𝑣𝑒𝑟𝑎𝑔𝑒(𝐺𝑂) -0.02 0.17***
(0.15) (0.16)
𝐴𝑣𝑒𝑟𝑎𝑔𝑒(𝑅) 1.02*** 1.18***
(0.16) (0.16)
𝐴𝑣𝑒𝑟𝑎𝑔𝑒(𝑠𝑡𝑎𝑡𝑒 𝑡𝑎𝑥 𝑒𝑥𝑒𝑚𝑝𝑡) 0.16 0.31
(0.27) (0.27)
𝐴𝑣𝑒𝑟𝑎𝑔𝑒(𝑓𝑒𝑑𝑒𝑟𝑎𝑙 𝑡𝑎𝑥
𝑒𝑥𝑒𝑚𝑝𝑡) -0.88*** -0.98***
(0.15) (0.15)
𝐶𝑜𝑛𝑠𝑡𝑎𝑛𝑡 2.80*** 2.54***
(0.33) (0.33)
Obs 4,540 4,540
Adjusted R2 0.59 0.58
Issuer gov. Level FE Yes Yes
Issuer state Fixed Effects Yes Yes
65