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

61 Pages Posted: 28 Nov 2023

See all articles by Michael Farrell

Michael Farrell

University of Wisconsin - Milwaukee - Department of Finance

Dermot Murphy

University of Illinois at Chicago

Marcus Painter

Saint Louis University - Department of Finance

Guangli Zhang

Washington University in St. Louis; Saint Louis University - Sinquefield Center for Applied Economic Research

Multiple version iconThere are 2 versions of this paper

Date Written: November 3, 2023

Abstract

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

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

Michael Farrell (Contact Author)

University of Wisconsin - Milwaukee - Department of Finance ( email )

Milwaukee, WI 53201-0742
United States

Dermot Murphy

University of Illinois at Chicago ( email )

2114 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
312-355-4372 (Phone)

HOME PAGE: http://sites.google.com/site/murphyderm

Marcus Painter

Saint Louis University - Department of Finance ( email )

Saint Louis, MO
United States

Guangli Zhang

Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1208
Saint Louis, MO MO 63130-4899
United States

Saint Louis University - Sinquefield Center for Applied Economic Research ( email )

3700 West Pine Mall Blvd. Fusz Hall, 358
St. Louis, MO 63103
United States

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