Market Segmentation and the Association between Municipal Financial Disclosures and Net Interest Costs

17 Pages Posted: 30 Jul 2008 Last revised: 28 Nov 2018

See all articles by Ehsan H. Feroz

Ehsan H. Feroz

University of Washington, Milgard School of Business-Accounting ; University of Illinois at Urbana-Champaign; Government of the United States of America - US GAO Advisory Council; University of Minnesota, Labovitz School of Business-Department of Accounting; University of Minnesota, Carlson School of Management-Department of Accounting; American Accounting Association

Earl R. Wilson

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business

Date Written: July 26, 2008

Abstract

We examined the association between financial disclosure and Net Interest Costs (NIC) in terms of finance studies that have suggested that the municipal bond market is segmented. Our results indicate that financial reporting measures are more strongly associated with NIC in the regional primary market (defined by the composition of the underwriting syndicate) than in the national markets.Slightly weaker but generally consistent results were obtained with alternative segmentation proxies-size of the city and size of the issue. One limitation of the study was the necessity to include in our sample hybrid syndicates consisting of both national and regional underwriters because of the small number of underwriting that occur in practice by syndicates comprised solely of national or regional firms.Nevertheless, our results suggest that syndicate leadership (whether managed by a national or regional underwriter) provides an adequate and perhaps conservative proxy for market segmentation

The results suggests that reporting quality is higher overall for municipalities operating in the national market but, since there are fewer alternative sources of relevant pricing information for bonds issued by smaller issuers, underwriters and investors in regional markets seem to react more strongly to variations in the quantity and quality of financial disclosure in pricing bonds. One implication is that smaller cities might improve marketability of their bonds by improving their financial reporting practices.

Finally, our findings suggest that researchers need to be sensitive to the institutional structures characterizing the municipal bond market. A logical extension of this study would be to identify other potentially segmented markets, such as the market for initial public offerings of corporate securities, which may also be characterized by informational differences (e.g, Feroz,Johnston, Reck and Wilson 2006). If other segmented markets exist, the usefulness of accounting information may also differ across markets, as appears to be the case for municipal bonds.


Keywords: tax exempt securities, municipal bonds, net interest costs, segmentation, government, political economy, information asymmetry, capital markets, market efficiency

JEL Classification: C12,G18, G20, G28, G38, H10, H11, H21, K33, L31, L32, L51, L81, M41, P16

Suggested Citation

Feroz, Ehsan H. and Wilson, Earl R., Market Segmentation and the Association between Municipal Financial Disclosures and Net Interest Costs (July 26, 2008). Accounting Review, Vol. 67, No. 3, July 1992. Available at SSRN: https://ssrn.com/abstract=1179264

Ehsan H. Feroz (Contact Author)

University of Washington, Milgard School of Business-Accounting ( email )

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University of Illinois at Urbana-Champaign ( email )

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Government of the United States of America - US GAO Advisory Council ( email )

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American Accounting Association ( email )

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Earl R. Wilson

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business ( email )

School of Accountancy
Columbia, MO 65211
United States
573-882-3225 (Phone)
573-882-2437 (Fax)

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