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Abstract
This thesis consists of two empirical essays that examine the determinants of municipal bond pricing. The first essay investigates the influence of political alignment on secondary market yields, while the second focuses on measuring ESG scores to uncover labeling gaps and assess their implications for primary market greenium. These studies contribute novel empirical evidence and datasets, employing diverse methodologies to analyze the roles of political favoritism and disclosure practices in shaping municipal bond pricing. The first essay is "Taking Sides: Political Alignment and Municipal Bond Yield", joint with Weijia Zhao. In this research, we show that politically misaligned counties face higher yield spreads, while aligned ones benefit from lower spreads. The magnitude of the effect varies on bond characteristics: bonds with long maturity, backed by utility revenue, and issued by counties less reliant on state transfers are less sensitive to political alignment shock. In addition, yield spread variations correlate with changes in credit risk and intergovernmental transfers. Politically misaligned counties elevate bond issuance despite higher costs, offsetting reductions in intergovernmental transfers. The second essay, "Shades and Traces of ESG in Public Finance: Evidence from 120,000 Municipal Official Disclosures,'' measures ESG scores in municipal bond primary market disclosures from 2012 to 2023 using large language models and Government Finance Officers Association (GFOA) guidelines, uncovering a persistent labeling gap between potential ESG alignment (from project content) and actual signaling (from explicit labels). This gap varies over time and across geography and is driven by political, economic, and social factors. Integrating these scores with Bloomberg data refines estimates of the municipal greenium, showing that substantive ESG disclosure practices influence primary market yields more than mere labels.