The Moderating Role of Disclosure Quality
40 Pages Posted: 5 Sep 2018 Last revised: 24 Nov 2019
Date Written: November 20, 2019
We examine whether municipal market participants' sensitivity to changes in local home values varies with the quality of local governments' financial reports. We find the credit ratings and bond yields of governments that are required to comply with GAAP are less sensitive to changes in local home values than similarly-affected governments that are not required to comply with GAAP. These governments do not experience different changes in net revenues ex post. The results are pronounced when the change in home values generates the most uncertainty (i.e., the change is adverse). The results are also stronger after GASB 34 increased the quality of GAAP-compliant issuers' financial reports. We conclude that market participants are less sensitive to signals about the local economy when local governments are required to provide high-quality disclosures.
Keywords: Reporting quality, transparency, cost of debt, credit ratings, municipal debt
JEL Classification: D80, G24, H74
Suggested Citation: Suggested Citation