The relationship between local government economic freedom and bond ratings

Abstract

Purpose With a newly developed measure of economic freedom across US local government jurisdictions, this paper aims to estimate the relationship between economic freedom and bond ratings. Design/methodology/approach The author uses a battery of cross-sectional econometric models to identify the impact that economic freedom might have on bond ratings using a sample of US municipal governments. Findings Overall, the results indicate that relatively more economic freedom within a local jurisdiction is associated with higher bond ratings and thus lower borrowing costs. However, similar to Roychoundhury and Lawson (2010), no specific subcomponent seems to affect bond ratings. Originality/value To the author’s knowledge this is the first scholarly work to address this topic at the local level.