The Information Externality of Corporate Financial Information in the Secondary State-Bond Market
54 Pages Posted: 31 Jan 2019
Date Written: January 20, 2019
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 predict states’ future economic development and are positively associated with contemporaneous state-bond returns. These findings suggest 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 and higher credit exposure, and when corporate earnings are ex-ante more relevant to states’ economic performance. Furthermore, the effect is stronger when corporate managers disseminate earnings news more extensively. Taken together, the evidence indicates a positive externality of corporate financial information that extends beyond the corporate sector to the state-bond market.
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