The issue of racial inequality is pervasive in American culture, but new research has found that the problem exists in a realm that was previously believed to be a safe haven from the issue – higher education.
A recent study conducted by faculty from the Rady School of Management at UC San Diego, Drexel University, the University of Notre Dame and Duke University finds that historically black colleges end up paying more than predominantly white colleges on similar financial footing to issue the same value of bonds.
The study, published by the Social Science Research Network, demonstrated that this is not the case for historically black colleges even though they have comparable financial strength, as verified by outside evaluations.
The researchers collected a 23-year sample of more than 4,000 tax-exempt municipal bond that were issued by 965 four-year universities, totaling approximately $150 billion. One hundred and twelve of the colleges sampled were issued by historically black colleges and universities (HBCUs).
The average cost of issuing a $30 million bond was $290,000 for historically black colleges, compared to $242,000 for other institutions. The black institutions studied spent about $5.1 million more, collectively, than comparable predominantly white institutions. This gap was greater in the Deep South than elsewhere.
Colleges typically have their finances and institutional strength reviewed by rating agencies before seeking to issue bonds. The varying ratings theoretically provide investors with a sense of relative risks associated with bonds from different colleges. Institutions with the same financial strength should be able to issue bonds at the same costs.
The researchers hope to use the insights obtained from the study to make positive changes to the status quo.
Parsons and his team suggested remedies to alleviate the issue, such as seeking investors from outside local HBCU areas, federal intervention and eliminating the incentive of investors to hold bonds of local issuers.
About Professor Christopher Parsons
Prior to coming to the Rady School, Parsons was an Assistant Professor of Finance at the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill. Before his position at the Kenan-Flagler School, Parsons was an Assistant Professor of Finance at the Desautels Faculty of Management at McGill University, Montreal. Parsons earned his Ph.D. in Finance at the McCombs School of Business at the University of Texas at Austin. He earned his B.S. with Highest Honors in Chemical Engineering.