Angela K. Gore

Consequences of GAAP Disclosure Regulation: Evidence from Municipal Debt Issues

We compare characteristics of municipal debt issues in states that mandate GAAP for municipalities with issues in states that impose no annual financial disclosure requirements. Cross-sectional comparisons indicate that the use of public (versus private) debt is greater, and municipal debt costs are 14 to 25 basis points lower, in states where GAAP is mandated. Moreover, municipalities in states that impose the GAAP requirement realize lower debt costs following the effective date of the regulation. These results suggest that GAAP requirements reduce municipal borrowing costs. More generally, the evidence indicates that financial reporting regulation reduces contracting costs between borrowers and lenders.

Financial Disclosure and Bond Insurance

Regulators typically assume that public financial disclosure is necessary for the efficient functioning of capital markets. Economists recognize that other mechanisms, such as insurance, can mitigate problems that occur when buyers have less information than sellers. We examine whether public financial disclosures and bond insurance are substitutes. Our data are from municipal issuers in Michigan, where financial disclosure is required by the state, and Pennsylvania, where disclosure is unregulated. We study municipal issuers because they are not covered by federal securities laws and state laws often allow issuers to choose the level of financial disclosure. Overall, we find that when disclosure is unregulated, issuers substitute between disclosure and insurance. When disclosure is required by state law, issuers use less insurance. Our results imply that required accounting disclosure is not necessarily optimal since rational issuers will trade off public disclosure and insurance when free to do so.

Why do Cities Hoard Cash? Determinants and Implications of Municipal Cash Holdings

This paper examines the determinants of municipal cash holdings and the implications of holding high levels of cash. The first part of the analysis investigates municipal manager incentives to accumulate cash as part of normal operations. Results indicate that municipalities with a higher variation in revenues, fewer sources of revenues, and higher growth accumulate more cash. Larger governments and those receiving relatively more state revenue accumulate less cash. Further analysis considers whether high levels of cash indicate agency problems, and finds municipalities with high cash holdings spend more on administrative expenses, city manager salaries, and bonuses. I find no evidence that municipalities with excess cash return it to citizens by reducing taxes. The presence of staggered councils and councils that are not independent tend to exacerbate excessive cash holdings. These results are consistent with the proposition that governments with high cash levels have agency problems relative to those with lower cash holdings.

Accounting Restatements, Governance and Municipal Debt Financing

We find that mean municipal debt costs are greater following financial restatement disclosures. Comparisons of the relative use of municipal debt, and of the use of unsecured versus secured debt, corroborate that financial restatements increase the cost of municipal debt financing. Additional analyses indicate that adverse consequences of restatements are mitigated by strong audit oversight and by provisions that encourage direct voter participation in the governance process. The evidence supports the use of restatements as a summary measure of financial reporting quality in the municipal context and informs thinking about auditor and voter oversight in the municipal financial reporting process.

Do Governments Hide Resources from Unions? The Influence of Public Sector Unions on Financial Reporting Choices

This study explores whether unionized municipalities use aspects of governmental (or “fund”) accounting to obscure the amount of resources available through the use of fund balance accounts. I first investigate whether governments with unions report more resources outside of the general fund, a primary measure of operating performance, and instead within less visible funds where financial statement users are less likely to focus. Second, I explore whether unionized governments hold resources within less transparent general fund balance account categories – that is, have higher ratios of reserved or designated fund balance. Primary findings are consistent with both hypotheses. Corroborating analysis reveals that effects are magnified when unions have the ability to strike or are located in states without right-to-work laws. Overall, the evidence suggests that unionized governments shelter resources within less visible accounts and funds to avoid reporting large discretionary resources.

Do Municipal Bond Markups Reflect Accounting Quality

We examine whether accounting measures of information uncertainty – specifically, the presence of internal control problems – impact municipal bond markups. Markups are the differences between the prices paid by investors and those stipulated in the underwriting agreement, and are a source of compensation to bond dealers. Markups are controversial in part because they are not transparent and individual investors comprise a large portion of the investor base. Primary findings suggest that municipal bonds issued by entities with a material weakness in internal controls exhibit larger markups. Findings are magnified under circumstances of greater information asymmetry between issuers and investors, such as for revenue bond issuances, delayed release of financial information, and retail investor trades. Moreover, bonds issued by entities with material weaknesses remain in dealer inventory significantly longer before eventual sale to investors. Our evidence is consistent with markups reflecting compensation to underwriters for the additional risk and effort involved in placing bonds issued by entities with serious accounting problems.