Polluting Public Funds: The Effect of Environmental Regulation on Municipal Bonds
48 Pages Posted: 21 Dec 2020 Last revised: 18 Nov 2021
Date Written: December 2020
We present three findings on the effects of environmental regulation on the municipal bond market. First, yields increase (decrease) after a new standard is proposed (finalized), consistent with the resolution of regulatory uncertainty. Second, around annual compliance announcements, yields fall for counties that remain in compliance but increase for newly noncompliant counties. Third, yields are substantially higher for bonds from counties just above the pollution threshold relative to counties just below the threshold. Our findings suggest that increases in regulatory stringency or uncertainty over future environmental policy increase the cost of municipal debt raised to fund critical infrastructure.
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