Discrimination in the Higher Education Bond Market

Statistical analysis reveals a history of discrimination against HBCUs

June 24, 2020
Accounting, Finance


Historically Black colleges and universites (HBCUs) have long faced an uphill battle when selling bonds to investors.

Bill Mayew admits it might seem he’d be unlikely to research matters of social justice.

“You might wonder why an accounting professor is writing papers about race discrimination in a bond market,” Mayew said in a LinkedIn Live series on fairness, justice and race.

The full video of the talk is above with shorter clips below.

An important theme throughout Mayew’s research pertains to how people treat each other. Instead of his usual accounting focus on how CEOs discriminate among financial analysts based on how favorably they view the firm, in this research, he focused on the tactics implemented by bond investors against HBCUs.

HBCUs have long faced discrimination, with the U.S. government even admitting that HBCUs have been mistreated relative to other schools. A paper written by Marybeth Gasman highlights this history of race discrimination prior to 1965.

Mayew says studying race discrimination in any market is difficult because there are two different mechanisms potentially at work. He says this is commonly illustrated in the labor market, where attributes statistically associated with race underpin the wage differences between races.

“A Black worker may be less likely on average to have health insurance or reliable transportation than a white worker. In turn, they are viewed as a less reliable employee on average, and are therefore paid less. This is called statistical discrimination.”

Mayew points out other examples where employers have both a personal and unconscious bias towards Black people. This rationale, originating from the subjective preference of the employer, is called taste-based discrimination.

Mayew says capital markets are supposed to remove the impact of any personal preferences like race. However, the investor base of the municipal bond market is unique in that state tax benefits accrue to investors residing in the same state as the issuer. Mayew says these tax benefits are particularly appealing to wealthy individuals, and the wealth distribution is well known to be tilted towards whites.

Mayew says this opens the door for taste-based discrimination to exist. He notes statistical discrimination could exist as well. For example, it would be reasonable for investors to avoid buying HBCU bonds because they're more likely to default on their payments.

Mayew says HBCUs are of poorer financial health and often lack the prestige and alumni donation rates when compared to non-HBCUs. But, he says, these facts are measurable and can therefore be removed to rule out statistical discrimination.

Mayew’s data analysis reveals HBCUs are, on average, charged 20 percent more to issue bonds compared to non-HBCUs. However, this effect is not the same everywhere.

“In states where racial animus is strongest, (Alabama, Louisiana and Mississippi) the incremental cost to HBCUs is 30 basis points, compared with 11 basis points for all other states. That is, the negative financial effects on HBCUs is three times larger in the far, deep South, versus the rest of the country.”

Mayew believes the best method for fixing this broken and discriminatory system lies in making HBCU bonds triple tax exempt -- not taxed at the federal, state or local levels on municipal bond income.

Mayew’s work inspired the HBCU Investment Expansion Act. The legislation would allow municipal bonds issued by HBCUs to be sold on a more level playing field through those three tax exemptions.

Introduced to Congress in 2016, the HBCU Investment Expansion Act has yet to pass. Mayew says if out-of-state buyers were provided a tax exemption, the market would open up and underwriters would not have to try and sell to a less-than-receptive local investor base. Rather, they could more easily search nationwide for a buyer.

Mayew encourages people to take action on dismantling systemic racism.

“If you see something, say something. Don't be passive," he said. "Document what you can, and use whatever platform you can to disseminate what you have observed. As academics, it's our job to listen to issues people face and use our skill sets to document fundamental facts that move beyond anecdotes in order to make society better.”

This story may not be republished without permission from Duke University's Fuqua School of Business. Please contact media-relations@fuqua.duke.edu for additional information.

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