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Abstract: 

This paper used data on general obligation bond sales in the United States from 1980 to 2006 to explore the impact of revenue diversification on credit ratings and, consequently, on borrowing costs. The findings indicate that a standard deviation increase in revenue diversification increases by 25% the probability that an issue will be rated Aaa. However, the results also indicate that increasing revenue diversification does not necessarily translate into lower borrowing costs for state governments. Although the sign of the coefficient is in the expected direction, i.e., negative, revenue diversification does not have a statistically significant impact on borrowing costs.

Keywords: Hirschman-Herfindahl Index (HHI); True Interest Cost (TIC)

Affiliations:  1: Rutgers University.