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Disclosure Complexity, Regulatory Burden, and the Cost of Capital
55 Pages Posted: 20 Jul 2023 Last revised: 13 Dec 2024
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Disclosure Complexity, Regulatory Burden, and the Cost of Capital
Number of pages: 55
Posted: 20 Jul 2023
Last Revised: 13 Dec 2024
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Disclosure Complexity, Regulatory Burden, and the Cost of Capital
George J. Stigler Center for the Study of the Economy & the State Working Paper No. 338
Number of pages: 55
Posted: 28 Nov 2023
Last Revised: 13 Dec 2024
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Date Written: July 12, 2023
Abstract
The $4 trillion municipal bond market is characterized by increasingly long and complex official statements that reduce information quality for local investors who form the backbone of this market. We show that official statement complexity translates to significantly higher municipal borrowing costs, especially for issuers with greater reliance on local markets or less complementary information from rating agencies. A within-underwriter spatial complexity instrument supports a causal interpretation. Using a large language model for categorizing text, we find that “legal complexity” matters most for the complexity-yield premium. The upward trend in complexity is attributable to increased regulatory enforcement from the SEC.
Keywords: municipal bonds, disclosure, complexity, textual analysis, clientele
JEL Classification: G12, G14, G18, H74
Suggested Citation: Suggested Citation
Farrell, Michael and Murphy, Dermot and Painter, Marcus and Zhang, Guangli,
Disclosure Complexity, Regulatory Burden, and the Cost of Capital
(July 12, 2023). Available at SSRN: https://ssrn.com/abstract=4507535 or http://dx.doi.org/10.2139/ssrn.4507535
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