HISTORICALLY BLACK COLLEGES and
universities (HBCUs) pay higher fees
than non-HBCU schools do to issue
tax-exempt bonds, and the cause could
be racial discrimination. Those are the
findings of four researchers: Casey Dougal,
an assistant professor of finance at
Drexel University’s LeBow College of
Business in Philadelphia, Pennsylvania;
Pengjie Gao, an associate professor
of finance at the University of Notre
Dame’s Mendoza College of Business in
Indiana; William Mayew, a professor of
accounting at Duke University’s Fuqua
School of Business in Durham, North
Carolina; and Christopher Parsons of
the University of Washington’s Foster
School of Business in Seattle.
The team of researchers studied
4,145 tax-exempt municipal bond issues, which totaled approximately
US$150 billion. These bonds were issued
between 1988 and 2010. Of the 965
higher education institutions included,
102 were HBCUs. When researchers
looked at the underwriting fees—that
is, the fees underwriters charge to
each school to bring a bond offering to
investors—they found that costs for
HBCUs were about 20 percent higher
than for other schools. For instance, a
$30 million bond issuance would cost
an HBCU about $290,000, compared to
$242,000 for a non-HBCU. The reason
for this difference could be that it is
more difficult for underwriters to find
buyers for the HBCU bonds.
In the paper, the scholars look for
other factors that could explain the
difference in fees, such as attributes specific
to each school, credit ratings, and
state tax breaks. But they conclude that
“racial animus” was the main cause. The
researchers also note that the effect of
this bias is three times more pronounced
in the Deep South states of Louisiana,
Alabama, and Mississippi.
The paper offers several potential
solutions such as lowering the price
point for investors to enter this market;
making the associated state tax benefit
transferable; or creating a federal law
that designates HBCU bonds as triple
tax-exempt, meaning they would be
exempt from paying federal, state,
and local taxes.
“What’s in a (School) Name? Racial
Discrimination in Higher Education
Bond Markets” is forthcoming in the
Journal of Financial Economics.