Informed Investors and Bond Offerings

Abstract

This paper documents a non-monotonic impact of local mutual funds on the pricing of municipal bond issuance. Offering yield spreads are higher in states where municipal bond funds' headquarters are located, and in states with larger aggregate local fund size. However, controlling for local fund size, yield spreads decrease as the number of local fund families increases. These findings are consistent with a security pricing model with multiple imperfectly informed investors and with the empirical evidence supporting local funds' informational advantage. Specifically, mutual fund trades predict local bonds' credit rating changes.

Keywords: security offerings, mutual funds, information asymmetry, municipal bonds

JEL Classification: G12, G14, G23