Tipped Off: Information Leakage in the Municipal Securities Market

Abstract

Regulators have long been concerned about the leakage of credit-relevant information in the U.S. municipal securities market. To assess how widespread information leakage is in this market, we examine trading before the announcement of credit rating downgrades. Our findings reveal a marked increase in selling activity in the weeks leading up to a public downgrade announcement, particularly in the week before. This pattern is stronger before severe downgrades, when private information is more valuable. These information transfers likely happen through formal networks; institutional investors are more likely to initiate these sales and selling pressure is stronger when issuers have greater incentives to share information with institutional investors. These patterns persist in the absence of pre-period EMMA disclosures and other observable indicators that could predict downgrades, consistent with the leakage of nonpublic information.

Edward M. Watts

Associate Professor of Accounting

Edward Watts is an Associate Professor of Accounting at the Yale School of Management.