The role of adverse outcomes in municipal debt costs

Christopher T. Edmonds, Ryan D. Leece, Beth Y. Vermeer and Thomas E. Vermeer

Advances in accounting, 2023, vol. 63, issue C

Abstract: This study investigates whether municipal bond prices reflect adverse outcomes (i.e., material noncompliance with laws and regulations and questioned costs) and the interactive effect of adverse outcomes and internal control weaknesses. Using hand-collected data from 866 official registration statements, our results suggest that adverse outcomes are an important determinant of initial bond yields and help explain the underlying relationship between weaknesses in internal control and initial bond yields. Specifically, the municipal bond market penalizes governments with adverse outcomes, with a greater penalty if an adverse outcome is accompanied by a material weakness in internal control.

Keywords: Adverse outcomes; Material noncompliance with laws and regulations; Questioned costs; Internal control weaknesses; Municipal bonds (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:advacc:v:63:y:2023:i:c:s0882611023000305

DOI: 10.1016/j.adiac.2023.100671

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