The Information Content of Government Financial Disclosure

Posted: 26 Jul 2022

See all articles by Zhiwei Chen

Zhiwei Chen

Shanghai University of Finance and Economics

Sibo Liu

Hong Kong Baptist University

Angie Wang

The Chinese University of Hong Kong (CUHK) - School of Accountancy

Date Written: July 1, 2022

Abstract

Using textual analysis methods, we investigate the information content of government financial disclosure and its implications. Specifically, we establish several stylized facts using the comprehensive annual financial reports (CAFRs) issued by municipal entities. We first document large differences between government and corporate disclosures. For example, municipal issuers are less likely to be distorted by opportunistic incentives in choosing the language. We then construct traditional textual measures (e.g., sentiment and financial constraint) commonly used in the corporate disclosure research to proxy for government administrative conditions. Their strong predictive power of the cost of borrowing, economic growth, and financing and investment behaviors of the local governments confirms the value of government financial disclosure in the financial markets. However, we also examine the financial market reaction to CAFRs and find that investors react slowly to most of the text-based signals in CAFRs, suggesting that this important information channel is not fully utilized by market participants. Our study supports the bondholder protection policies through improving the quality of government disclosure.

Keywords: Textual analysis, government disclosure, government reporting, financial disclosure

JEL Classification: M41, M48, G10, G14, M40

Suggested Citation

Chen, Zhiwei and Liu, Sibo and Wang, Angie, The Information Content of Government Financial Disclosure (July 1, 2022). Available at SSRN: https://ssrn.com/abstract=4154831

Zhiwei Chen

Shanghai University of Finance and Economics ( email )

NO. 777 Guoding Road
Shanghai, 200433
China

Sibo Liu

Hong Kong Baptist University ( email )

Renfrew Road 34
Kowloon Tong
Hong Kong

Angie Wang (Contact Author)

The Chinese University of Hong Kong (CUHK) - School of Accountancy

Shatin, N.T.
Hong Kong

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