Municipalities Disclosure and Bond Price Volatility

• In Event: Issues in the Municipal Debt Market

Abstract

In the recent years, municipal market regulators have issued numerous disclosure initiatives to improve the quality of information in the municipal market. How these initiatives affect the market, however, is still not identified (GAO, 2012). This paper uses the Heckman two-step model to examine empirically the association between continuing disclosure quality and new bond issue price volatility, controlling for the probability of the bond issue being traded in the market. This study finds that the proximity of prior period financial statement filing to bond issuance date has a significant impact on bond price volatility. The closer the financial statement filing date to bond issuance date, the greater its impact on price volatility. This finding indicates that the asymmetric information problem in the municipal market is mostly caused by investors’ asymmetric access to information. Since informed investors tend to have more access to various information sources, the longer the period between information filing and new bond issuance, the more these informed investors gain advantages over individual investors, causing greater price dispersion in the market. Therefore, more frequent information filing is needed, not only to improve the transparency in the municipal secondary market but also to reduce the information discrepancies among investors.

Author

• Yulianti Abbas, Universitas Indonesia