The Complexity Yield Puzzle: A Textual Analysis of Municipal Bond Disclosures
61 Pages Posted: 28 Nov 2023
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The Complexity Yield Puzzle: A Textual Analysis of Municipal Bond Disclosures
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
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