A recent study led by Casey Dougal, an assistant professor of finance at Drexel University in Philadelphia, found that historically Black colleges and universities pay higher fees to underwriters than other colleges and universities to secure tax-exempt bonds for major projects. The authors conclude that racism plays a role in these higher fees.
The authors of the study examined the fees for 4,145 tax-exempt bonds issued between 1988 and 2010 totaling $150 billion. HBCUs issued 102 of those bonds.
The research found that on average non-HBCUs paid underwriting fees that averaged 81 cents for every $100 raised. So for a $10 million bond, the average fee was $81,000. For HBCUs the fees rose to an average of 92 cents for every $100 raised, or $92,000 for a $10 million bond. In Alabama, Mississippi, and Louisiana, HBCUs paid, on average, $106,000 to underwrite a $10 million bond.
The authors found that HBCUs pay higher fees than predominantly White institutions with the same credit rating that were insured by the same companies. They also found the effect was three times as great where the author say “racial animus remains the most severe.” The authors also note that “HBCU-issued bonds are also more expensive to trade in secondary markets and, when they do, sit in dealer inventory longer.”
The full study, What’s in a (School) Name? Racial Discrimination in Higher Education Bond Markets,” was published on the website of the Journal of Financial Economics. It may be accessed here.