Financial Reporting and Municipal Bond Rating Changes
Posted: 11 Jul 2014 Last revised: 12 Jul 2014
Date Written: October 1981
Municipal bond rating changes can have significant consequences for both borrowers and investors. Multivariate discriminant analysis (MDA) was used to examine whether financial ratios could discriminate between cities that had their ratings upgraded or downgraded from an A rating. In addition, both the upgraded and the downgraded groups of cities were matched, using a paired sample design with a control group to examine the predictive ability of fiscal information. Fiscal variables do appear to be associated with rating revisions. In addition, it appears that rating revisions are more closely associated with operating working capital flow than the "total flow of resources" statement generated by current generally accepted accounting principles (GAAP).
Keywords: Municipal financial reporting, bond rating chages
JEL Classification: M41
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