Barry R. Marks

The Effect of Voluntary GAAP Compliance and Financial Disclosure on Governmental Borrowing Costs

State and local governments are not subject to Securities and Exchange Commission (SEC) regulations requiring compliance with generally accepted accounting principles (GAAP). It was only in 1980 that Standard & Poors issued a policy statement indicating a failure to conform with GAAP would be considered a negative factor in establishing municipal bond ratings. Until May 1986, governmental GAAP was not even enforceable under Rule 203 of the AICPA code of ethics. While some state governments regulate the accounting practices of their local governments, the states themselves are exempt from all accounting regulations. In this unregulated environment, differential levels of financial disclosure by the states are observed. Differential disclosure is presumably the outcome of an economic decision based on the conventional equalization of the marginal costs and benefits of GAAP compliance. In this paper, we try to estimate the magnitude of one potential benefit accruing from differential GAAP compliance—the interest cost savings on general obligation bonds. Our study suggests the bond markets are “informationally efficient” in the sense that bond prices incorporate the effects of differential GAAP compliance.

State regulation of accounting practices and municipal borrowing costs

This article examines the association between state regulation of accounting practices and municipal borrowing costs. The results demonstrate that stringent accounting regulations do have an effect on borrowing costs after abstracting the effect of other explanatory variables. The direction of the observed effect is difficult to assess due to presence of multicollinearity in the model. However, lower borrowing costs are suggested by the analysis.

Structural Deficits and State Borrowing Costs

This study examines the factors that affect the borrowing costs of state governments with specific attention being paid to the impact of state structural deficits (or fiscal imbalances) on borrowing costs. The findings for 1999-2000 suggest that interest costs for state competitively sold municipal securities reflect estimates of state structural deficits. States with a higher structural deficit were found to pay significantly higher interest costs. The evidence implies that bond ratings do not fully reflect the fiscal problems faced by state governments.

Tax Effort as an Indicator of Fiscal Stress

The most visible credit market measure of the fiscal health of a municipality is the credit rating. In this article we ask whether the credit rating fully incorporates the fiscal stresses faced by municipal governments. We utilize state “tax effort” as a measure of the fiscal stress faced by a municipality. The findings suggest that municipalities located in states characterized by poor fiscal health pay higher than average interest costs on their bond issues (holding credit rating constant). State “tax effort” seems to reflect elements of fiscal stress that are not adequately taken into account through the rating process.

The Influence of Accounting Information Disclosed under GASB Statement No. 34 on Municipal Bond Insurance Premiums and Credit Ratings

This paper examines the impact of accounting information on first the cost of municipal bond insurance and secondly on the credit rating awarded on municipal debt, using data disclosed under Statement No. 34 of the Governmental Accounting Standards Board (GASB 34) for insured general obligation debt issued by Texas cities. It finds that both governmental fund and government‐wide financial information is related to the cost of municipal bond insurance and the credit rating on municipal debt. The paper also shows that the utilization of accounting information by bond insurers is not identical to its use by a bond rating agency.

Stock Ownership Structure and Voluntary Disclosure of Quarterly Foreign Sales Data of U.S. Multinational Corporations

The ownership structure of a corporation can alleviate the agency problem that arises between shareholders and managers of a corporation, which implies that the ownership composition of a firm may infl uence the level of voluntary disclosure. This study investigates whether the ownership structure of U. S. based multinational corporations affects the managerial decision to voluntarily disclose quarterly foreign segment data. The empirical results show that the three ownership variables of interest, institutional stock ownership, managerial stock ownership and outside blockholder stock ownership are inversely related to the level of voluntary disclosure of quarterly foreign segment data. Therefore, it is inferred that an increase in the proportion of outstanding common stock held by these ownership groups is accompanied by a decrease in the probability that a U.S. multinational firm voluntarily discloses quarterly foreign segment data.

Dueling Revenue Caps and Municipal Bond Yields: The Case of Houston, Texas

Two competing revenue cap proposals, one from a citizens group and the other proposed by the mayor, were on the November 2004, election ballot of the City of Houston, Texas. Both propositions passed, yet the citizens group had to sue to have their initiative enforced. This study examines the effect on Houston bond yields of the series of events (from June 2004 through March 2006) surrounding these dueling revenue cap propositions. The empirical findings suggest that the budget-related events can have a significant effect on yields demanded by investors in the secondary market for outstanding uninsured tax-exempt general obligation debt.

State supervision of local borrowing and budgeting practices and municipal net interest cost: An empirical evaluation

State supervision of local government budgeting and borrowing practices has the objective of inhibiting “budgetary financial distress” and restricting the use of debt financing to only legitimate purposes. Our empirical evidence suggests that State supervision is indeed systematically associated with lower borrowing costs. This is one area where greater State intrusion may actually provide significant benefits to local governments.

Infrastructure Reporting and State Bond Ratings

Municipal governments are given the choice of two methods for reporting infrastructure assets, the depreciation approach and the modified approach. Using a model that simultaneously estimates a states bond rating and a states choice of the modified approach to reporting infrastructure, empirical tests suggest that bond rating agencies evaluate the government-wide accounting information differently for states that adopt the modified approach compared to states that use depreciation accounting. The use of the modified approach may lead to either a higher or lower bond rating, depending on the level of other accounting measures.

Employee Stock Options: Alternative Valuation Models: Two Valuation Models Result in Lower Reported Expense on the Income Statement

The Financial Accounting Standards Board (FASB) is considering modification of the method of accounting for employee stock options. It has tentatively decided that goods and services received in exchange for all forms of stock-based compensation should be recognized as an expense and that this expense should be measured at fair value. A major issue to be considered during the deliberations by the FASB concerns the valuation models used to estimate the fair value of stock options and therefore the expense to be recognized. This article reviews the current status of the valuation of employee stock options and suggests two different valuation models that result in lower reported expense on the income statement.