The Influence of Fraud on Bond Yield in the New Information Age: Evidence From Municipal Bond Issuances

The authors examine how the interaction between municipal bond yields and fraud varies over time. Prior literature provides early evidence of a link between corruption and bond pricing, and the authors’ study extends the work by testing whether the results are still relevant in the modern capital market using an updated sample in an era where the information environment has evolved over the past two decades. The authors find results that confirm the findings of prior literature do persist in the modern era. The authors also find evidence that the relation between corruption and bond yield strengthens over the authors’ sample period. In supplemental tests, the authors find evidence that corruption is only associated with bond yields in the post-2015 period, demonstrating that a changing information environment has influenced the impounding of political corruption into bond pricing. The authors also examine the effects of watchdog groups on the results and find evidence that this third-party monitoring is a useful tool for regulating capital markets.