Municipal Bond Trading and Political Scandals

Abstract

We study municipal bond trading activity before, during, and after announcements of government officials’ misconduct. Using a sample of over 39,000,000 bond trades from January 2006 to December 2013 in nearly 500,000 bonds, we find that spreads are higher on initial news announcement, indictment announcement, and trial verdict announcement days than other trading days. Spreads remain elevated for five trading days following these announcements. We also find that large bond trades account for the majority of price discovery on announcement days. Overall, our results establish a link between government officials’ misconduct and municipal bond markets.

TOPIC: Financial crises and financial market history

Key Findings

• • This article examines how municipal bond traders react to news regarding potential wrongdoing by government officials.

• • We examine news announcements regarding the misconduct of state officials, and the effect that might have on municipal bond trading. We find that when there is a news announcement related to the misconduct or wrongdoing of a government official, the average municipal bond trade size is increases.

• • We find that municipal bond spreads increase on news related to potential miscount of state officials.

• • We find that price discovery in municipal bonds occurs more in larger size trades when news related to potential miscount of state officials is revealed.