This article explores how the performance of municipalities is influenced by the use of bonds to fund municipal operations. City councils compete to retain new voters, helping them to control the local government ‘s services and budgets. We claim that municipal bond sales directly impact cities by reducing their borrowing costs and indirectly by improving their operating performance. We are using case studies of four municipalities in Israel to test this hypothesis. Our key findings show that the implementation of bonds as an alternative to fund municipalities, even if the issuance is not repeated, has a lasting effect on the city’s bargaining power with the banks. Other municipalities that have not issued bonds often profit from the leverage that, when negotiating with banks, this incentive gives them. In addition, we find that the use of bonds greatly increases municipalities’ operating performance. This article has shown that the key gain of a bond problem is the long-term improvement of the municipalities’ administrative and financial conduct.
Suzy Shrem Cohen
Guilford Glazer Faculty of Business and Management, Ben-Gurion University of the Negev,
Guilford Glazer Faculty of Business and Management, Ben-Gurion University of the Negev, Beer-Sheva, Israel.
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