The complexity yield puzzle: A textual analysis of municipal bond disclosures

Michael Farrell, Dermot Murphy, Marcus Painter and Guangli Zhang

No 338, Working Papers from The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State

Abstract: We study the effect of official statement textual complexity on municipal borrowing costs (yield) through the clientele channel. Theoretically, complexity reduces signal quality for unsophisticated investors, potentially increasing yield. We provide causal evidence of an economically significant complexity-yield premium that is especially large for issues with greater tax-induced exogenous demand from unsophisticated investors or less complementary information from rating agencies. We decompose complexity into multiple topics and find that "legal complexity" matters most for the complexityyield premium. Despite this premium, complexity has been trending upward across all credit categories. This trend is attributable to increased regulatory enforcement from the SEC.

Keywords: municipal bonds; disclosure; complexity; textual analysis; clientele (search for similar items in EconPapers)
JEL-codes: G12 G14 G18 H74 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cbscwp:279822

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