Polluting Public Funds: The Effect of Environmental Regulation on Municipal Bonds

48 Pages Posted: 21 Dec 2020 Last revised: 18 Nov 2021

See all articles by Akshaya Jha

Akshaya Jha

Carnegie Mellon University

Steve Karolyi

Carnegie Mellon University

Nicholas Z. Muller

Carnegie Mellon University - David A. Tepper School of Business

Date Written: December 2020

Abstract

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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Suggested Citation

Jha, Akshaya and Karolyi, Steve and Muller, Nicholas Z., Polluting Public Funds: The Effect of Environmental Regulation on Municipal Bonds (December 2020). Available at SSRN: https://ssrn.com/abstract=3753120 or http://dx.doi.org/10.2139/ssrn.3753120

Akshaya Jha (Contact Author)

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

Steve Karolyi

Carnegie Mellon University

Pittsburgh, PA 15213-3890
United States

Nicholas Z. Muller

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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