Investigating Private Information in the Public Sector: A Study of the Municipal Bond Rating Process

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Abstract

The purpose of this research is to ascertain the extent to which private information is used by credit rating agencies (CRAs) to assess the credit-worthiness of municipalities that issue bonds. Since the 2008 financial crisis, both the declining performance of municipal governments and the credibility of CRAs (Jiang, Stanford, and Xie 2012; Collins 2014) has led to questions about the use of public and private information by stakeholders to assess default risk. Our study suggests that CRAs use private information to assess the credit-worthiness of municipalities. Market participants consider the use of private information value relevant, as it provides incremental information that lowers the overall effect of the yield premium. Our results contribute to the existing literature by examining the use of private information in a governmental setting.

Authors

• Amanda Beck, The University of Alabama

• Linda M Parsons, University of Alabama-Tuscaloosa

• Peter M Johnson, University of Alabama-Tuscaloosa