Markets price politicians: Evidence from China’s municipal bond markets

Abstract

This paper studies China’s municipal bond markets to find whether mayors’ abilities to grow the economy is priced by investors. Studying the primary market, we find that mayors’ abilities increases investors’ demand for municipal bonds. As a result, a one standard deviation increase in a mayor’s ability reduces investors’ demand yields by 11.4 basis points. A study of the secondary market finds similar results. Ability has stronger impacts on bonds with longer terms, issued by issuers with lower ratings or issued in more competitive markets. Ability also has stronger impacts in the first year of a mayor’s tenure and on bonds issued by economically or financially less developed cities.