Bonding for Labor: Initial Evidence on Municipal Social Covenants for Labor Protection

Abstract

This study provides initial evidence on social covenants in municipal bond issuers' private debt agreements. Leveraging a recent disclosure amendment mandating private debt reporting, we document social covenants that require issuers and their contractors to uphold worker wage and safety standards, ensure equal employment opportunity, expand job and business access for disadvantaged groups, prohibit forced labor, and safeguard labor unions. Using the secondary market data, we find that issuers disclosing such covenants subsequently face lower bond trading spreads, suggesting that investors reward credible social commitments with lower borrowing costs. This effect is robust to various tests addressing endogeneity and is particularly pronounced among issuers with greater labor-related risks and where bondholders have financial or non-financial incentives to support labor protection. Our findings highlight the public finance benefits of credible social commitments stipulated by private debt covenants and underscore the role of debt contracting in aligning capital market incentives with social objectives.

Keywords: municipal bonds, private debt contracts, debt covenants, labor protection, social commitments