The Information Externality of Corporate Financial Information in the Secondary Municipal-Bond Market

• In Event: Disclosure

Abstract

This study provides evidence on the role of corporate financial information in secondary municipal-bond markets that are often characterized by informational opacity. In particular, I investigate the informational role of statewide aggregate earnings and find that corporate-earnings changes that are aggregated to the state level are positively associated with state-bond returns. This finding suggests that statewide aggregate earnings provide bondholders with real-time signals about regional economic performance. In cross-sectional analyses, I show that the effect is especially pronounced when bondholders face higher agency costs, when corporate earnings are ex-ante more relevant to state economic performance, and when corporate managers and the media disseminate the earnings news more extensively. Taken together, the evidence is suggestive of a positive externality of corporate financial information that extends beyond the corporate sector to the municipal-bond market.

Author

• Stephanie F. Cheng, University of Toronto, Rotman School of Management