Author ORCID Identifier

http://orcid.org/0000-0002-3815-4123

Year of Publication

2016

Degree Name

Doctor of Philosophy (PhD)

Document Type

Doctoral Dissertation

College

Graduate School

Department

Public Policy and Administration

First Advisor

Dr. Dwight V. Denison

Abstract

As an alternative way to issue bonds, conduit financing has been widely used by local governments and nonprofit organizations. Conduit financing allows one entity to issue debt on behalf of single or multiple borrowers. In the state of California in the U.S., a local agency is allowed to issue municipal bonds in compliance with law, but can also borrow through a joint powers agency (JPA). In this case, the JPA serves as a conduit. Conduit financing is preferred by local agencies in certain circumstances because it is more convenient or fixed issuance costs can be split between several conduit borrowers through bond pooling. In China, various Chinese local government issued debts through the local government financial vehicles (LGFV); LGFV is viewed as a conduit. Conduit operations, however, bring extra financial and administrative burdens. In this dissertation I examine borrowing costs of local governments in the U.S. and in China, particularly paying attention on debts issued through conduits.

The chapter 2 provides a background context and theoretical foundation of the whole dissertation. In addition, two mechanisms--borrowing through JPAs in the U.S. and through Chinese local government funding platforms will be compared to identify the similarity and distinctive perspectives. Based on data from California Debt and Investment Advisory Commission (CDIAC), the third chapter of my dissertation aims to probe into two issues: (1) what drives local agencies to use conduit? (2) Did conduit financing produce lower TIC than other revenue bonds? The emergence and existence of this type of conduit is profoundly historical and political. One reason for this is informational asymmetry in the municipal bond market. The disclosure requirements of the municipal bond market are weaker than the corporate bond market, and plenty of small issuers are less known by municipal bond investors. Although bond pooling provided by conduits is supposed to lower borrowing costs, most bonds issued by JPAs finance a single local agency. Therefore, it is important to investigate the incentives for these local agencies to use conduits instead of arm’s-length investors. As a matter of fact, during the borrowing process, the JPA is a type of financial intermediary that can reorganize small issues more efficiently. Hence, sophisticated local agencies with strong backgrounds prefer to borrow directly from the credit market under their name. To avoid selection bias and potential endogeneity problems, a two-stage least squares (2SLS) regression will be used. My empirical results show that ceteris paribus, TICs of California local governments are significantly reduced through conduit financing. Chapter 4 focuses on Chinese local government debts issued through the local government financial vehicles (LGFV). Specifically, this chapter addresses two questions: (1) in Chinese quasi-municipal credit markets, is there any evidence that the quasi-municipal bond market is influenced by market principles? (2) How are borrowing price, borrowing volume, and infrastructure expenditure interconnected? Using data from 2007 to 2012, through a simultaneous equation model, I found that the municipal credit system in China has the mixed characteristics of relationship-based and market-based systems; and that the available fiscal resources and debt have a complementary relationship.

To my knowledge, there are very few studies that consider drivers of debt financing choices of local governments and empirically examined the impact of conduit financing on their borrowing costs. My research seeks to bridge this gap. Since most local governments have been burdened with heavy debts, understanding how the conduit financing fiscally influence local governments is very important.

Digital Object Identifier (DOI)

https://doi.org/10.13023/ETD.2016.426

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