Dissertation
Essays on public finance
University of Iowa
Doctor of Philosophy (PhD), University of Iowa
Summer 2025
DOI: 10.25820/etd.008164
Abstract
This dissertation focuses exclusively on the topics in public finance. In the first chapter, I include a default term and construct a novel measure of high-net-worth individuals’ consumption into an affine model to address the muni-bond puzzle. The second chapter examines the impact of wildfire risk on public financing costs. In the third chapter, we document the motivation that municipalities engage in strategic financial reporting.In Chapter 1 titled ”Luxury Consumption and Municipal Bonds”, I incorporate a default term and a novel measure of high-net-worth individuals’ consumption into an affine model to address the muni-bond puzzle, narrowing the yield spread between long-term municipal and tax- adjusted Treasury bonds from 192.4 bps using the observed municipal bond yield to 5.7 bps with the model-implied yield. The remaining yield disparity is primarily influenced by state GDP. Inter- actions between state GDP with migration patterns, job opportunities, and educational attainment further reduce pricing discrepancies in the municipal bond market.
In Chapter 2 titled ”Wildfire Risk and Municipal Bond Yields” is coauthored with Dr. Thomas Berry-Sto ̈lzle. We find that the municipal bond market begins pricing wildfire risk around 2000. A one-standard-deviation rise in wildfire risk leads to a 3.646 basis points increase in a bond’s yield spread, increasing financing cost for affected communities. The effect on yield spreads disappears for maturities of less than 1 year or more than 15 years, supporting the view that wild- fire risk is a medium-term risk. When including measures of investor attention into our analysis, we find that investor attention is associated with an additional increase in yield spreads. Fire mit- igation measures, on the other hand, are associated with a reduction in yield spreads, highlighting the benefits of wildfire risk management for municipal financing.
In Chapter 3 titled ”Earnings Management in Local Governments” is coauthored with Dr. Erik Lie and Dr. Tyler Menzer. This study examines the influence of earnings management on municipal bond ratings among U.S. local governments, particularly in the context of GASB 14 and GASB 34. Our findings indicate that municipalities engage in strategic financial reporting to improve their bond ratings, with frequent small increases in net income leading to an enhancement of 0.086 notches in initial bond ratings and 0.099 notches in total bond ratings. The effect is significantly magnified by six times when financial statements are disclosed prior to bond rating dates. Given that investors are inclined to hold bonds with high ratings, our analysis reveals that improved bond ratings, especially initial bond ratings, lead to high trading yields in the secondary market.
Details
- Title: Subtitle
- Essays on public finance
- Creators
- Yi Hao
- Contributors
- Erik Lie (Advisor)Thomas Berry-Stölzle (Committee Member)Amrita Nain (Committee Member)Cameron Ellis (Committee Member)Foti Grigoris (Committee Member)
- Resource Type
- Dissertation
- Degree Awarded
- Doctor of Philosophy (PhD), University of Iowa
- Degree in
- Business Administration (Finance)
- Date degree season
- Summer 2025
- DOI
- 10.25820/etd.008164
- Publisher
- University of Iowa
- Number of pages
- x, 151 pages
- Copyright
- Copyright 2025 Yi Hao
- Language
- English
- Date submitted
- 07/28/2025
- Description illustrations
- color illustrations, color maps
- Description bibliographic
- Includes bibliographical references (pages 124-137).
- Public Abstract (ETD)
The long-term municipal bonds often pay higher interest rates than similar U.S. Treasury bonds, which has puzzled researchers for years. I explore the reasons behind this phenomenon by adding two key ideas to an economic model: the risk of states not paying back their debt (default risk) and a new way to measure how much wealthy people spend on luxury goods. This improved model explains almost all of the difference in yields, reducing the gap from 1.92% down to 0.06%. The small remaining gap is mostly due to differences in state economies, like their overall income levels. When I also consider how state income relates to people moving for jobs and education, the unexplained gap becomes even smaller. This helps us better understand how municipal bonds are priced and why investors demand the returns they do.
Coauthored with Dr. Thomas Berry-St lzle, we study how the wildfire risk affects municipal bond market since 1990. We find that local governments began to see wildfire risk incorporated into municipal bond pricing around the year 2000, effectively raising borrowing costs for communities exposed to greater wildfire threats. We also find that this effect is concentrated within bonds with medium-term maturities, between one and fifteen years. Moreover, when we account for measures of investor attention, such as media coverage or search trends, we observe that heightened investor awareness further amplifies yield spreads. In contrast, communities that implement fire mitigation strategies experience a reduction in the issuance costs.
Collaborated with Dr. Erik Lie and Dr. Tyler Menzer, we look at how local governments in the U.S. may adjust their financial reports to get better credit ratings for their municipal bonds. We find evidence that many municipalities make small, strategic increases in reported net income to slightly boost their bond ratings, which can be even bigger if they release their financial statements right before the rating is set. Since investors often prefer highly rated bonds, these improved ratings can help local governments borrow more cheaply, but they also lead to higher yields when those bonds trade later on.
- Academic Unit
- Tippie College of Business
- Record Identifier
- 9984948539302771
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