The Complexity Yield Puzzle: A Textual Analysis of Municipal Bond Disclosures

We study the effect of official statement textual complexity on municipal borrowing costs (yield) through the clientele channel. Theoretically, complexity reduces signal quality for unsophisticated investors, potentially increasing yield. We provide causal ev- idence of an economically significant complexity-yield premium that is especially large for issues with greater tax-induced exogenous demand from unsophisticated investors or less complementary information from rating agencies. We decompose complexity into multiple topics and find that “legal complexity” matters most for the complexity- yield premium. Despite this premium, complexity has been trending upward across all credit categories. This trend 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, The Complexity Yield Puzzle: A Textual Analysis of Municipal Bond Disclosures (November 3, 2023). George J. Stigler Center for the Study of the Economy & the State Working Paper No. 338, Available at SSRN: https://ssrn.com/abstract=4647066 or http://dx.doi.org/10.2139/ssrn.4647066