The Information Externality of Corporate Financial Information in the Secondary State-Bond Market

This study provides the first evidence on the role of corporate financial information in the state-bond secondary market. In particular, I investigate the informational role of corporate earnings announcements and find that monthly earnings signals that are aggregated at the state level predict states’ future economic development and are positively associated with contemporaneous state-bond returns. These findings suggest that public firms’ earnings announcements provide bondholders with real-time signals about regional economic performance. In cross-sectional analyses, I show that the effect is especially pronounced when bondholders face greater agency costs and higher credit exposure, and when corporate earnings are ex-ante more relevant to states’ economic performance. Furthermore, the effect is stronger when corporate managers disseminate earnings news more extensively. Taken together, the evidence indicates a positive externality of corporate financial information that extends to the state-bond secondary market.