The Effect of Tax Abatement Disclosure on Municipal Financing *

Abstract

Local governments' use of business tax incentives (abatements) is economically significant and controversial. But understanding of their impact on governmental financing costs is limited. Although mandatory disclosures of tax abatements can reduce information asymmetry and improve monitoring, they can also expose unfavorable details about the magnitude of government awards and lead to investor backlash. Utilizing the adoption of Governmental Accounting Standards Board Statement No. 77 (GASB 77), which requires local governments following Generally Accepted Accounting Principles (GAAP) to disclose information about tax abatements, we investigate whether and how mandatory abatement disclosures affect municipal financing costs. We find the adoption of GASB 77 is associated with significant decreases in the cost of bonds issued by treated counties. Cross-sectional tests suggest that both decreased information asymmetry and increased public and regulatory scrutiny serve as the channels. Further analysis reveals that treated counties experience improved municipal bond ratings. Overall our results point to the economic benefits of tax incentive transparency.

Keywords: Government transparency, GASB 77, Tax abatement, Municipal bond JEL classification: G12, H11, H25, H74, H83

JEL Classification: G12, H11, H25, H74, H83