The Information Content of Municipal Financial Statements: Large-sample Evidence

Abstract

The usefulness of financial disclosures is a source of considerable debate in the municipal setting, given their lack of timeliness. This paper empirically examines the extent to which municipal financial disclosures have information content. Using the entire universe of annual financial disclosures from 2009 to 2020, we show that trading activity in the secondary market for municipal bonds increases after the disclosures are filed. Both institutional and retail trades increase around disclosure filings, but the effect is pronounced for retail traders, for whom the reports are more likely to provide new information. Moreover, the heightened trading is pronounced for timelier disclosures, consistent with regulators' views that untimely disclosures are less likely to provide new information. We also find a pronounced response when investors' risk is high and when the disclosures contain risk-related discussions. Our results contrast with earlier research and provide the first large-scale evidence that participants in the U.S. market for municipal bonds perceive financial disclosures to have informational value.