The effects of high-quality financial reporting on municipal bond ratings: evidence from US local governments

ABSTRACT

While credit rating agencies mention that a government factor is one criterion for assessing municipal bond ratings, current studies on credit ratings offer relatively little evidence as to how the government factor affects municipal bond ratings, compared to socioeconomic and financial factors. By utilising the award of the Certificate of Achievement for Excellence in Financial Reporting Programme of the Government Finance Officers Association as an indicator for high-quality financial reporting, we find that the quality of financial reporting is one important factor that determines municipal bond ratings. We also demonstrate that the repeated actions of providing high-quality financial reporting are valuable for municipalities by enhancing market credibility and thus improving ratings. The positive impact of high-quality financial reporting is greater for municipalities which have just begun to give a signal of providing transparent financial information to the market than municipalities which have already built market credibility for a long time.

KEYWORDS:

• Financial reporting
• municipal credit ratings
• comprehensive annual financial report
• information asymmetry

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. The omitted states in our sample include Alaska, Colorado, Florida, Hawaii, North Dakota, and Wyoming.

Additional information

Notes on contributors

Jinsol Park

Jinsol Park is a Ph.D. candidate in the Martin School of Public Policy and Administration at the University of Kentucky. Her research broadly focuses on public budgeting and finance, local government administration, and public performance and management.

Hakyeon Lee

Hakyeon Lee received his doctorate degree from the Martin School of Public Policy and Administration at the University of Kentucky in 2020. His research interests include tax incentives, state and local government financial management, and municipal securities.

J. S. Butler

J. S. Butler is a professor in the Martin School of Public Policy and Administration at the University of Kentucky. He is an econometrician working in economics, public policy, pharmacy, and psychology. His research has appeared in journals including Journal of Econometrics, Review of Economics and Statistics, Econometrica, Teaching of Psychology, among many others.

Dwight Denison

Dwight Denison is a professor in the Martin School of Public Policy and Administration at the University of Kentucky. His areas of research and teaching include nonprofit financial management and tax administration. His research has appeared in journals including Public Budgeting & Finance, Public Administration Review, Public Finance Review, among many others.