Polluted waters and municipal finance

• Main Authors: HUANG, Daisy, KUMAR, Amit
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2021
• Subjects: Municipal Bonds; Drinking Water Pollution; PFAS; Forever Chemicals; Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/7043; https://ink.library.smu.edu.sg/context/lkcsb_research/article/8042/viewcontent/SSRN_id3821639.pdf
• Institution: Singapore Management University

We show that pollution increases the offering yields of municipal bonds, indicating increased risk. We establish this using a difference-in-differences design, comparing the bonds from U.S. counties revealed to contain per- and poly-fluoroalkyl substances (PFAS) in their drinking-water supplies with the bonds from neighboring, unpolluted, same-state counties. The increase was greater for riskier bonds characterized by repayment obligation, ex-ante debt burden, unrated issuance, maturity, and bankruptcy access. The resulting pollution-related investment needs and a reduction in public sector employment and expenditure likely underlie the risk. An instrumental variable-like method utilizing airports as a potential contamination source reaffirms the causal interpretation.