A new study by scholars at Drexel University in Philadelphia, the University of Notre Dame in Indiana, Duke University in North Carolina, and the University of California, San Diego, finds that historically Black colleges and universities pay a higher underwriting fee for debt issues than predominantly White institutions even when credit reporting agencies rate the debt issues as having similar risk.
The researchers examined more than 4,100 bond issues in the period from 1988 to 2010. Of these bond issues, 102 were from 45 different historically Black colleges or universities. For institutions with the same bond ratings, the HBCUs incurred an average underwriting fee of $290,000 for a $30 million bond. For comparable predominantly White colleges and universities, the issuance of a $30 million bond cost these institutions, on average, $242,000.
The authors conclude that “the high spreads HBCUs are charged reflect, in turn, high selling costs born by underwriters. Indeed, conversations with municipal bond traders suggest that bonds issued by HBCUs are particularly illiquid, or in industry parlance, ‘harder to place.’ Further, it is perceived that racial animus by potential investors is the source of this illiquidity.”
The paper, “What’s in a (School) Name? Racial Discrimination in Higher Education Bond Markets,” was published by the Social Science Research Network. It may be downloaded by clicking here.