The Effect of Tax Abatement Disclosure on Municipal Financing

56 Pages Posted: 30 Nov 2023

See all articles by Lei Li

Lei Li

Hong Kong Polytechnic University

Liwei Weng

The Hong Kong Polytechnic University

Jaron H. Wilde

University of Iowa - Henry B. Tippie College of Business

Cheng (Colin) Zeng

Hong Kong Polytechnic University

Date Written: November 13, 2023

Abstract

Local governments’ use of business tax incentives (abatements) is an economically significant, if controversial, practice. But understanding of how abatements affect governmental financing costs is limited. While mandatory disclosures of local government abatements could mitigate information asymmetry and enhance monitoring of their use, they could also reveal unfavorable information about how (or how much) governments use them, leading to investor backlash. We exploit the recent adoption of GASB standard 77, which requires local governments following GAAP to disclose information about tax abatements, to investigate whether and how mandatory abatement disclosures affect municipal financing costs. Our difference-in-differences analyses suggest that the adoption of GASB 77 is associated with significant decreases in the cost of bonds issued by treated counties. This effect is more pronounced in counties with higher (lower) information asymmetry (public and regulatory monitoring). Further analysis reveals that treated counties experience increases in GDP growth and decreases in unemployment, consistent with public disclosures helping discipline tax abatement decisions. Overall the results provide compelling evidence regarding the economic benefits of governmental tax incentive transparency.

Keywords: Government transparency, GASB 77, Tax abatement, Municipal bond

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

Suggested Citation

Li, Lei and Weng, Liwei and Wilde, Jaron H. and Zeng, Cheng, The Effect of Tax Abatement Disclosure on Municipal Financing (November 13, 2023). Available at SSRN: https://ssrn.com/abstract=4631817 or http://dx.doi.org/10.2139/ssrn.4631817

Lei Li

Hong Kong Polytechnic University

Liwei Weng (Contact Author)

The Hong Kong Polytechnic University ( email )

School of Accounting and Finance
M701, Li Ka Shing Tower
Hong Kong
China
+852 2766-7053 (Phone)

Jaron H. Wilde

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

Cheng Zeng

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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