The Information Content of Municipal Financial Statements: Large-sample Evidence

Abstract

The perceived informational value of financial disclosures is a source of considerable regulatory and academic debate in the municipal setting. In this paper, we examine the extent to which post-issuance municipal financial disclosures have information content. Using the entire universe of post-issuance annual financial disclosures from 2009 to 2022, we show that after disclosures are filed, trading activity increases in the secondary market for municipal bonds. Although we find the response to disclosures is modest on average, there is significant heterogeneity based on investor type, the amount of information conveyed at the disclosure, and bond liquidity. Our findings also establish the critical roles of investor processing costs and information acquisition via alternative channels in moderating the response. Our results contrast with earlier research and provide the first large-scale evidence that participants in the U.S. market for municipal bonds perceive post-issuance financial disclosures to have information content.

Publication
Working Paper
Edward M. Watts
Edward M. Watts
Assistant Professor of Accounting

Edward Watts is an Assistant Professor of Accounting at the Yale School of Management.

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