Municipal Bond Trading and Political Scandals

We study municipal bond trading activity before, during, and after announcements of government officials' misconduct. Using a sample of over 39,000,000 bond trades from January 2006 to December 2013 in nearly 500,000 bonds, we find that spreads are higher on initial news announcement, indictment announcement, and trial verdict announcement days than other trading days. Spreads remain elevated for 5 trading days following these announcements. We also find that large bond trades account for the majority of price discovery on announcement days. Overall, our results establish a link between government officials' misconduct and municipal bond markets.