Infrastructure Reporting and Pricing Uncertainty on Seasoned Municipal Bonds

• In Event: Saturday Breakfast
  In Paper Session: Round Table 2

Abstract

One of the most significant and controversial components of GASB’s Statement 34 is that it added a requirement that governments capitalize fixed assets, including infrastructure assets, in the government-wide financial statements with depreciation to be reported in the Statement of Activities. After much debate surrounding this provision during the comment period prior to the release of Statement 34, a modified method of reporting infrastructure assets was developed as an option, allowing states to capitalize certain infrastructure assets and report on their condition, rather than reporting depreciation on those assets.
Ultimately, roughly half of the U.S. States adopted the modified approach to reporting capital assets and half adopted full depreciation accounting. This study evaluates whether the choice of modified approach versus full depreciation provides more useful information to municipal investors and in turn results in more efficient pricing in the municipal bond market. Specifically this study evaluates the relationship between a state’s choice of infrastructure reporting and investor bid spreads on that state’s bonds in the seasoned municipal capital markets. This is an important contribution to the body of literature on GASB’s Statement 34 and to the fixed income literature addressing the relationship between information asymmetry and bid-ask spreads. It also provides important practical information to governments by evaluating whether choosing to adopt the modified approach reduces information asymmetry with investors. This can provide monetary savings to governments through their borrowing costs and improve market efficiency for investors.

Authors

• Rebecca Bloch, Fairfield University

• Justin Marlowe, University of Washington

• Dean Michael Mead, Governmental Accounting Standards Board