Limits of Disclosure Regulation in the Municipal Bond Market

Abstract

We examine the effectiveness of recent federal disclosure regulation aiming to improve transparency in the $4 trillion municipal bond market. Governments fail to disclose material private placements 50-60% of the time and, conditional on disclosure, filings often omit contract details essential for bond pricing. Non-compliant issuers are significantly riskier than compliers, with disclosure decreasing in the potential of privately placed debt to adversely affect bondholders. We show that disclosure reveals positive news and is especially informative to investors in low-rated bonds or during market crises. Overall, privately placed debt continues to pose significant risks to municipal bond investors.

Keywords: municipal bond pricing, disclosure regulation, private placements

JEL Classification: H74, G14, G18