Investor Attention and Municipal Bond Returns

59 Pages Posted: 20 Sep 2017 Last revised: 11 Sep 2021

See all articles by Kimberly Cornaggia

Kimberly Cornaggia

Pennsylvania State University - Department of Finance

John Hund

University of Georgia

Giang Nguyen

Pennsylvania State University - Smeal College of Business

Date Written: September 10, 2021

Abstract

We analyze the extent to which investors in opaque markets price information from more transparent markets. Exploiting the natural experiment created by bond-insurer insolvency, we show that municipal bond investors did not price early signs of insurers’ increased default risk revealed through the equity and CDS markets, and only reacted when these insurers were later downgraded. Institutional investors respond to information faster than retail investors, but still with significant delay. The severity of the investor inattention we document is relevant to the current debate over the costs and benefits of SEC proposals to improve the timeliness and quality of local government disclosure.

Keywords: Market segmentation, market efficiency, municipal bonds, bond return indices, bond insurance, investor attention

JEL Classification: D82, D83, G12, G14, H74, M48

Suggested Citation

Cornaggia, Kimberly and Hund, John and Nguyen, Giang, Investor Attention and Municipal Bond Returns (September 10, 2021). Available at SSRN: https://ssrn.com/abstract=3039098 or http://dx.doi.org/10.2139/ssrn.3039098

Kimberly Cornaggia (Contact Author)

Pennsylvania State University - Department of Finance ( email )

306 Business Bldg
University Park, PA 16802
United States
814-865-2243 (Phone)
814-865-3362 (Fax)

HOME PAGE: http://directory.smeal.psu.edu/kjr15

John Hund

University of Georgia ( email )

Athens, GA 30602
United States

Giang Nguyen

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802
United States

HOME PAGE: http://directory.smeal.psu.edu/gxn13

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