tailieunhanh - Default Risk Cannot Explain the Muni Puzzle: Evidence from Municipal Bonds That Are Secured by U.S. Treasury Obligations

Fama (1977) and Miller (1977) predict that one minus the corporate tax rate will equate aftertax yields from comparable taxable and taxexempt bonds. Empirical evidence shows that long-term tax-exempt yields are higher than theory predicts. Two popular explanations for this empirical puzzle are that, relative to taxable bonds, municipal bonds bear more default risk and include costly call options. I study . government secured municipal bond yields which are effectively default-free and noncallable. These municipal yields display the same tendency to be too high. I conclude that differential default risk and call options do not explain the municipal bond puzzle | Default Risk Cannot Explain the Muni Puzzle Evidence from Municipal Bonds That Are Secured by . Treasury Obligations John M. R. Chalmers University of Oregon Fama 1977 and Miller 1977 predict that one minus the corporate tax rate will equate aftertax yields from comparable taxable and taxexempt bonds. Empirical evidence shows that long-term tax-exempt yields are higher than theory predicts. Two popular explanations for this empirical puzzle are that relative to taxable bonds municipal bonds bear more default risk and include costly call options. I study . government secured municipal bond yields which are effectively default-free and noncallable. These municipal yields display the same tendency to be too high. I conclude that differential default risk and call options do not explain the municipal bond puzzle. This article is based on Chapter 1 of my dissertation at the University of Rochester. I thank my dissertation committee John Long chairman Mike Barclay and Neil Pearson for their invaluable help and encouragement. I am very grateful to Tom Barone at J. J. Kenny and Co. Inc. for providing the municipal bond data used in this study. I thank Richard Green for providing me with the Salomon yield data. Joanne Mays Becker of Dillon Read Co. Tom Lockard of Stone and Youngberg Arthur Miller of Goldman Sachs and John Overdorff of Chapman Cutler provided valuable help. I thank Gordon Bodnar David Brown Dave Chapman Michele Daley Diane Del Guercio Dave Denis Roger Edelen Rob Hansen Dave Haushal-ter Mark Huson Paul Irvine Chris James Greg Kadlec Aditya Kaul Philip Kearns Wayne Mikkelson Megan Partch Jim Poterba Mike Weisbach and Jim Ziliak for many helpful comments. The comments of seminar participants at Arizona State University the University of Arizona Case Western Reserve the University of Florida the University of Oregon the University of Utah Virginia Tech the Wharton School and the NBER Universities Research Conference on Taxes and Financial Behavior are .