The Moderating Effect of Disclosure Quality on Changes in the Cost of Debt: Evidence from Municipal Credit Rating Downgrades

• In Event: Issues in the Municipal Debt Market

Abstract

Among local governments of the same credit quality that are exposed to the same relative change in local house prices, we examine the relation between predetermined disclosure quality and changes in issuer credit ratings. We find issuers that choose stronger disclosure quality are less likely to be downgraded, ceteris paribus. We corroborate these findings using municipal bond insurance as an instrument for disclosure quality. Moreover, we show that after Ambac’s bankruptcy, issuers of insured bonds improve their disclosure quality and are less likely to be downgraded than similarly affected issuers of uninsured bonds. These results suggest that disclosure quality continues to lower the cost of debt after issuance by attenuating the impact of negative economic outcomes.

Authors

• Christine Cuny, New York University

• Svenja Dube, New York University