Historically black schools pay more to issue bonds, researchers find

August 17, 2018 by Carol Elliott, University of Notre Dame
Credit: CC0 Public Domain

A new study from the University of Notre Dame found that historically black colleges and universities (HBCUs) pay higher fees to issue tax-exempt bonds than non-HBCUs. And the evidence points to racial discrimination as the cause.

This was the finding of Paul Gao, Viola D. Hank Associate Professor of Finance at Notre Dame's Mendoza College of Business, and co-authors Casey Dougal of Drexel University, William J. Mayew of Duke University and Christopher A. Parsons of the University of Washington. The researchers published their findings in "What's in a (School) Name? Racial Discrimination in Higher Education Bond Markets," forthcoming in the Journal of Financial Economics.

The research paper tests the theory begins with the reasoning that "economic development deters the expression of discrimination, racial or otherwise," which originally was set forth in economist Milton Friedman's book "Capitalism and Freedom." Therefore, it should be unlikely that a "product" such as the municipal bond market would exhibit signs of .

The researchers discovered evidence to the contrary.

They collected information from a 23-year (1988-2010) sample of 4,145 tax-exempt municipal bond issues, totaling approximately $150 billion. Of the 965 colleges and universities involved, 102 were HBCUs.

After examining the underwriting fees—the fees that underwriters charge a school to bring a bond offering to investors—Gao and his co-authors found that HBCU issuance costs were about 20 percent higher than for non-HBCUs. A $30 million issuance would cost an HBCU about $290,000, compared to $242,000 for a non-HBCU. The difference appears to be due to the fact that it was more difficult for underwriters to find buyers for the HBCU bonds.

The papers considers numerous factors that could possibly explain the difference other than race, such as school attributes, credit ratings and state tax breaks. But Gao and colleagues ultimately conclude that racial animus was the primary driver. Further, the effect was even more pronounced in the Deep South states of Louisiana, Alabama and Mississippi, which rank highest in racial resentment and opposition to affirmative action as measured in the Cooperative Congressional Election Study survey and racially biased social media. The researchers found that HBCUs in those states were paying underwriters three times more to place their bonds relative to HBCUs in other states.

The paper presents several potential solutions to the problem, from lowering the price point for investors to enter this market, to making the associated state tax benefit transferable, to a federal law that designates HBCU bonds as triple tax exempt, applying to federal, state and local taxes.

Explore further: Historically black colleges and universities may be more supportive of students

More information: Casey Dougal et al. What's in a (School) Name? Racial Discrimination in Higher Education Bond Markets, SSRN Electronic Journal (2016). DOI: 10.2139/ssrn.2727763

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3 / 5 (2) Aug 17, 2018
Institutionalized racism. So sad, so bad.
2.3 / 5 (3) Aug 17, 2018
The reason bonds cost more is that investors don't buy the bonds because they don't believe they will pay off or there will be a difficulty cashing them in later. And that can be ascribed to the fact that predominantly blacks schools have extremely poor performance, tend to have more wear and damage and often have gangs. It can be said that whites who didn't even own slaves in The Old South saw their lives and conditions ruined by methods of Reconstruction that overly and even unfairly favored blacks, and that can lead to resentment. But, frankly, predominantly black schools in The South can be worse than those in The North. Too, note, the reference to The South is supposed to "prove" a necessary racial angle. Why, then, in the supposedly "enlightened" North is the disparity existent to such a degree?
Note the unspoken but requisite assertion in the article that blacks are spiritually, emotionally, academically exactly the same as whites.
3 / 5 (2) Aug 17, 2018
The whole idea of a Historically Black College is separatist and divisive. People push diversity but then accept a college or university whose whole point is lack of diversity. It needs to stop.

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