UCLA

Prior work has demonstrated a connection between the racial composition of a community’s residents and the terms of credit that community experiences. However, these studies largely draw from large population city samples and take limited approaches to the dynamic. Here, regression analysis of bond transaction data from California suburbs provides evidence that racial difference in municipal bond markets manifests in at least three key areas: the credit rating, interest, and fees associated with a bond offering. The effect persists even when controlling for bond type or other factors like median income or property tax revenues, and is present in suburban communities at rates comparable to or exceeding those experienced in larger core cities. Social network analysis shows that smaller cities operate in distinct segments of the California municipal bond markets from their larger counterparts, and low-income cities with proportionally high residents of color operate in the most segmented part of the network. Finally, interview data reveals that these latter cities tend to structure their relationships with financial services provider firms adhering to RFP processes in adherence to professional standards, rather than using long-term trust-building relationships preferred by other small suburbs. The arrangement effectively cuts these cities out of networks of trust undergirding the entire bond market. This structural arrangement may explain some of the mechanism for the racial difference manifesting in the bond market.