The Effects of Tax Clientele on Disclosure: Evidence from the Municipal Bond Market

48 Pages Posted: 30 May 2024

See all articles by Novia (Xi) Chen

Novia (Xi) Chen

University of Houston - Department of Accountancy & Taxation

Michelle Hutchens

University of Illinois

Junwei Xia

Texas A&M University - Department of Accounting

Date Written: May 28, 2024

Abstract

The municipal bond market has been widely criticized for its lack of disclosure, which prior research has attributed to weak regulatory oversight. We propose the tax clientele for tax-exempt municipal bonds as another explanation and examine whether the taxability of municipal bonds is associated with issuers’ disclosure practices. Individual investors form a primary tax clientele for tax-exempt municipal bonds, whereas taxable municipal bonds attract institutional investors. Consistent with institutional investors demanding and monitoring disclosure, our analyses suggest that municipal bond issuers provide more continuing disclosures in years with taxable bonds outstanding relative to years without. We also observe that issuers previously without taxable bonds increase continuing disclosures after issuing a taxable bond, consistent with the differing tax clientele for taxable bonds shaping municipality’s continuing disclosure. Our analyses can inform regulators of the municipal bond market and tax policymakers examining the costs and benefits of the tax-exempt status afforded to municipal bonds.

Keywords: municipal bonds, tax clientele, continuing disclosure

JEL Classification: H20, H74, M41

Suggested Citation

Chen, Novia (Xi) and Hutchens, Michelle and Xia, Junwei, The Effects of Tax Clientele on Disclosure: Evidence from the Municipal Bond Market (May 28, 2024). Available at SSRN: https://ssrn.com/abstract=4846382 or http://dx.doi.org/10.2139/ssrn.4846382

Novia (Xi) Chen

University of Houston - Department of Accountancy & Taxation ( email )

Bauer College of Business
4800 Calhoun Road
Houston, TX 77204
United States

Michelle Hutchens (Contact Author)

University of Illinois ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Junwei Xia

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

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