Racism in the Bond Market? A Finance Professor Investigates

Casey Dougal, assistant professor of finance

Academic research in finance doesn’t often resonate outside of academia. But a recent publication by Casey Dougal, assistant professor of finance, has attracted attention due to the wider social implications of its findings: namely, that Historically Black Colleges and Universities (HBCU) face discrimination when issuing debt in the bond market.

Dougal’s article, “What’s in a (School) Name? Racial Discrimination in Higher Education Bond Markets,” is forthcoming in the Journal of Financial Economics, and he says that he and his co-authors – Pengjie Gao of the University of Notre Dame’s Mendoza College of Business; William Mayew of Duke University’s Fuqua School of Business; and Christopher Parsons of the University of Washington’s Foster School of Business – had this research topic “handed to us on a silver platter” by a bond trader at a large investment bank, who reported difficulty in selling bonds issued by an HBCU. “He suggested there might be some discrimination going on,” Dougal says. “We ran with it, and it turned out to be the case.”

Higher-education bond markets work in the following manner: When a college wants to issue some debt, they go to an underwriter, typically a large investment bank, which purchases the debt from the school at a discount. The bank then sells the debt to the public at more or less full price as municipal bonds, with the difference in price being what the bank charges as a fee for selling these bonds.

“We found that when these underwriters try to place debt from an HBCU, they actually charge them a bigger discount, and they do this because it’s harder for them to turn around and find a buyer for the bond,” Dougal says.

Dougal notes that his research typically looks at different behavioral issues in finance – what he calls “market imperfections,” areas where individuals upset standard, rational theory.

“Economic theory suggests that the effects of racism should be eliminated through competitive market forces,” he says. “So it’s kind of interesting that we find evidence of it in such a large, sophisticated market.”

Dougal and his co-authors examined these instances of discounts in the bond market around different times of racial unrest, though most were not statistically significant enough to include in the final paper. Ultimately, the researchers looked at the level of discount by state on 4,145 tax-exempt municipal bond issues, issued between 1988 and 2010 and totaling approximately $150 billion.

“We show that the discount was largest where racism or racial problems are the largest historically: Alabama, Louisiana and Mississippi,” Dougal says.

While Dougal and his co-authors have considered further analysis to identify racial animus in other markets, or in the municipal bond market at large, they haven’t started any new studies yet. However, the paper in Journal of Financial Economics identifies some potential solutions, such as a change in the tax status for municipal bonds issued by HBCUs, and Dougal notes that there were two bills sponsored in the U.S. Senate citing his paper as an impetus to this end.

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