Price Discovery in the Municipal Bond Market

, University of 黑料传送门 Booth

In this paper, we investigate how information is impounded in the price of municipal bonds. The municipal bond market is extremely large, representing approximately $2.5 trillion in investments. However, the market is characterized by a lack of transparency and low quality financial reporting. Using data on the issuance prices of municipal bonds and their secondary trading, we study the relative importance of macroeconomic versus municipal-specific information in price formation. In particular, we examine the effect of municipalities’ accounting-based financial performance measures on debt pricing in both the primary and secondary municipal bond markets and bond trading in the secondary market. Since municipal leaders face political and corruption incentives, we also investigate whether state-level corruption indices and the timeliness of financial reporting influence the relative importance of municipal-specific information and its effect on bond pricing. Overall, we contribute to the literature on municipal disclosure, on the role of political forces in capital markets and on price discovery in opaque markets.