The Real Effects of Municipal Bond Markets: Evidence from Establishment-Level Data

Abstract

Local governments’ bond issues carry information about local macroeconomic outlook that is valuable for firms’ internal human capital allocation. We find that firms increase local employment by 0.14% after a one-standard-deviation increase in a county’s municipal bond issuance. These effects are more pronounced when municipal bond issues are more informative about future local economic outlook and are underwritten by connected underwriters who hold shares in the firm. These effects are also larger among firms with stronger incentives to learn from municipal bond signals. Aggregate firm-level performance is also higher, suggesting that the allocation of human resources is beneficial to firms.