The Information Externality of Public Firms' Financial Information in the State-Bond Secondary Market

This study provides evidence on the role of public firms' financial reports in the state-bond secondary market. I investigate the informational role of corporate earnings announcements and find that public firms' monthly earnings signals aggregated to the state level are positively associated with contemporaneous state-bond returns. Further analyses reveal that public firms' earnings announcements predict traditional economic indicators and contain incremental information that is independent of the traditional economic indicators. In cross-sectional analyses, I show that the earnings-returns relation is especially pronounced when bondholders face longer investment horizons and higher credit risks. Taken together, the evidence indicates a positive externality of corporate financial reports in alleviating the opacity in the municipal bond secondary market.