Municipal financing costs following disasters

This paper documents the response of the municipal bond market to major floods, and assesses several explanations for this response. The results show that bonds sold following floods exhibit yields about 7% higher than bonds sold at other times. Issuance costs, selection bias, and liquidity costs do not explain the higher yields, nor does credit risk appear likely to justify a large proportion of the increase. Consistently with a behavioral explanation, the abnormal yields fade away over time and are limited to first-time disaster counties, where the floods are least expected.