Do Municipal Bond Investors Pay a Convenience Premium to Avoid Taxes?
We study the valuation of state-issued tax-exempt municipal bonds and find that there are significant convenience premia in their prices. These premia parallel those identified in Treasury markets. We find evidence that these premia are tax related. Specifically, the premia are related to measures of tax and fiscal uncertainty, forecast flows into state municipal bond funds, and are directly linked to outmigration from high-tax to low-tax states and to other measures of tax aversion such as IRA and retirement plan contributions. These results suggest that investors are willing to pay a substantial premium to avoid taxes.
We are grateful for helpful discussions with Andrew Kalotay. All errors are our responsibility. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Francis A. Longstaff
The only source of financial support for this research was my regular salary as a UCLA Faculty Member. No outside financial support for this research was received. No other party had the right to review the results of the paper prior to publication.
In the past three years, I have worked/consulted for the UCLA Anderson School, University of California at Berkeley, Blackrock, PIMCO, Simplex Holdings, CALPERS, Fidelity, Putnam, UBS, and Structured Portfolio Management.