Corruption and Triple Exempt Municipal Bonds : The Case of Puerto Rico

In this study we examine the effects of corruption in the quality of municipal bonds by Puerto Rico's government. Puerto Rico's political framework offers a unique combination of two legal systems which are positioned at opposite ends of legal protection offered to investors: the French code and the English code. Different from the states, Puerto Rico's legal system is based on the French civil code and at the same time functions as a federal U.S. district. Compared to the states, this dual legal system is more vulnerable to higher corruption and consequently higher costs imposed to shareholders when state government officials issue municipal bonds. This study focuses on the effect of corruption on several attributes of the Puerto Rico's municipal bonds including credit risk, pricing of securities, underwriters fees and choice of financial institutions