The Information Externality of Public Firms’ Financial Information in the State-Bond Secondary Market

56 Pages Posted: 31 Jan 2019 Last revised: 5 Dec 2019

See all articles by Stephanie F. Cheng

Stephanie F. Cheng

Tulane University - A.B. Freeman School of Business

Date Written: November 27, 2019

Abstract

This study provides the first evidence on the role of corporate financial information in the state-bond secondary market. In particular, I investigate the informational role of corporate earnings announcements and find that monthly earnings signals 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 public firms’ earnings announcements 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 to the state-bond secondary market.

Keywords: Information Externalities, Information Transfer, State-Bond Secondary Market, Municipal Bond Secondary Market, Aggregate Earnings, Regional Economic Signals, Agency Costs, Public Finance

Suggested Citation

Cheng, Stephanie F., The Information Externality of Public Firms’ Financial Information in the State-Bond Secondary Market (November 27, 2019). Available at SSRN: https://ssrn.com/abstract=3321344 or http://dx.doi.org/10.2139/ssrn.3321344

Stephanie F. Cheng (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

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