The Information Externality of Corporate Financial Information in the Secondary State-Bond Market
60 Pages Posted: 17 Jul 2017 Last revised: 2 Nov 2017
Date Written: November 1, 2017
This study provides the first evidence on the role of corporate financial information in the secondary state-bond market that is 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 at 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 greater agency costs, higher credit exposure, and greater information opacity, and when corporate earnings are ex-ante more relevant to states’ economic performance. Furthermore, the effect is stronger when corporate managers and business media disseminate 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 state-bond market.
Keywords: Information Externalities, Information Transfer, Secondary State-Bond Market, Aggregate Earnings, Regional Economic Signals, Agency Costs, Media Coverage
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