Investor attention and municipal bond returns

Kimberly Cornaggia, John Hund and Giang Nguyen

Journal of Financial Markets, 2022, vol. 60, issue C

Abstract: We analyze whether investors in opaque markets price information from more transparent markets. Exploiting the natural experiment created by bond-insurer insolvency, we show that U.S. municipal bond investors did not price early signs of insurers’ increased default risk revealed through the equity and CDS markets, and only reacted when these insurers were later downgraded. Institutional investors respond to information faster than retail investors, but still with significant delay. The severity of the investor inattention we document is relevant to the current debate over the costs and benefits of SEC proposals to improve the timeliness and quality of local government disclosure.

Keywords: Market segmentation; Market efficiency; Municipal bonds; Bond return indices; Bond insurance; Investor attention (search for similar items in EconPapers)
JEL-codes: D82 D83 G12 G14 H74 M48 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:60:y:2022:i:c:s1386418122000301

DOI: 10.1016/j.finmar.2022.100738

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