Relevance of GASB-34 Information In the Secondary Municipal Bond Market

• In Event: Governmental Financial Reporting

Abstract

The objective of this study is to examine whether the Governmental Accounting Standards Board (GASB) Statement No. 34 financial reporting model has substantially increased the value of financial reports by providing users with a more complete understanding of a government’s financial position. More specifically, we examine whether the information presented in the government-wide statements and governmental-fund statements has resulted in greater transparency and improved pricing of municipal bonds in the secondary market. We use secondary market data to develop a measure of price volatility. We also develop metrics of position (i.e. net assets and fund balance) and performance (i.e. operating surplus or deficit) using data reported by the states in their Comprehensive Annual Financial Reports (CAFRs). We then match our transaction level data to the financial reporting data, and use the merged data set to test whether information reported in these statements has resulted in pricing efficiency. We find financial performance measures are significant for both inter-dealer transactions and customer-buy and customer sell transactions when we test our outcome variable (price volatility) with various measures of position and performance as reported in the government-wide statements as well as the traditional governmental fund statements. Our study finds less price variability if the government reported an operating surplus; however, price variability was considerably greater if the government reported an operating deficit.

Authors

• Sharon Nduku Kioko, Syracuse University

• Tima Moldogaziev Moldogaziev, University of South Carolina

• Craig Johnson, Indiana University