The Impact of Dodd–Frank on True Interest Cost of Municipal Bonds: Evidence From California

Ivonchyk, Mikhail

doi:10.1111/pbaf.12209

Cited by 4 publications

(6 citation statements)

References 31 publications

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“…The literature on the covariates of issuance and borrowing costs is too numerous to discuss here for reasons of brevity. We refer the reader to research on issuer factors (Benson & Marks, 2005;Bland, 1984Bland, , 1985Grizzle, 2012;Guzman & Moldogaziev, 2012;Harris & Munley, 2011;Simonsen et al, 2001), issue factors and market conditions (Allen & Dudney, 2010;Bland, 1987;Daniels & Vijayakumar, 2007;Forbes et al, 1992;Harris & Munley, 2011;Ivonchyk, 2019;Johnson, 1994;Johnson & Kriz, 2005;Kidwell & Sorensen, 1983;Leonard, 1994Leonard, , 1996Moldogaziev et al, 2017Moldogaziev et al, , 2019Peng & Brucato, 2003;Robbins & Simonsen, 2007Simonsen & Robbins, 1996;Vijayakumar & Daniels, 2006;Yusuf et al, 2010).…”

Section: Resultsmentioning

confidence: 99%

“…In addition, the same financial firms appear to act as both advisers on some CABs and switch to underwriting on some other CAB deals. Such repeated financial advisor and underwriter transactions may have negative cost effects to local governments (e.g., Luby & Moldogaziev, 2013; Moldogaziev & Luby, 2016), though borrowing costs in the municipal debt market are nowadays reportedly tighter and became relatively more transparent after Dodd‐Frank (Ivonchyk, 2019).…”

Section: Discussionmentioning

confidence: 99%

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Capital appreciation bonds and the cost of borrowing

Moldogaziev

Kriz

2023

Public Budgeting & Finance

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A Capital Appreciation Bond (CAB) is a financial instrument that is most attractive as a resource-flow management instrument. It bridges multiple fiscal years for jurisdictions experiencing rapid growth, potentially stretching for decades, but may also be used by localities experiencing fiscal distress. Using debt issuance data by independent school districts in Texas, who utilized almost all such bonds in the state, we present empirical evidence that CABs are associated with both the service and fiscal pressure factors. We further observe that, though the threat from CABs in terms of borrowing costs may have been exaggerated, enacting limits on debt repayment ratios (ratio of payment size at maturity to premium size) was likely the right legislative intervention.

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Section: Resultsmentioning

confidence: 99%

Section: Discussionmentioning

confidence: 99%

Capital appreciation bonds and the cost of borrowing

Moldogaziev

Kriz

2023

Public Budgeting & Finance

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“…True interest cost of the GO bond is used as the dependent variable ( Interest Cost ) in the model and is a proxy for a municipality’s default risk (Ivonchyk, 2019; Apostolou et al. , 2014; Baber et al.…”

Section: Methodsmentioning

confidence: 99%

“…True interest cost of the GO bond is used as the dependent variable (Interest Cost) in the model and is a proxy for a municipality's default risk (Ivonchyk, 2019;Apostolou et al, 2014;Baber et al, 2013;Baber and Gore, 2008;Sengupta, 1998). Interest Cost measures borrowing cost and is calculated as the average interest cost across all the maturities of a bond in a serial issue, scaled by the total dollar amount maturing each year (Ragland, 2017;Reck and Wilson, 2014).…”

Section: Research Design 41 Regression Modelmentioning

confidence: 99%

Regulated public accessibility to municipalities’ financial reports and bond interest cost

Cha,

Plante,

Ragland

2024

JPBAFM

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PurposeIn this study, we examine regulated public accessibility to municipalities’ financial reports and bond interest cost. In particular, we examine whether there is information content in a component of a constrained filing period that is useful to municipal bond market participants. The component of a filing period that we focus on is the period of time between an audit report date and a regulated public accessibility date.Design/methodology/approachTo explore our research question, we collect a sample of observations from municipalities that: (1) are required to post annual/audit financial reports on a centralized state-level repository that includes a “transparent” date stamp on when reports are made publicly available and (2) have issued general obligation bonds. Our sample is limited to one observation per municipality. The sample period is 2006–2019. In terms of approach, we use an ordinary least square (OLS) regression model to empirically test whether the time period between municipalities’ audit report date and state-required repository filing date is associated with general obligation bond interest cost.FindingsWe find support for the idea that there is information content in a component of a constrained filing period. In particular, we hypothesize and find a positive association between the time period between an audit report date and a state filing date and general obligation bond interest cost. Seemingly, this component of time may provide something unique or not available in other components of a constrained filing period (e.g. the fiscal year-end date to the audit report date). In post hoc analyses, we also find that both components of the constrained filing period in our setting (i.e. the audit report date to state filing date and the fiscal year-end date to audit report date) need to be considered for either of the components to be significant. Moreover, although both components are necessary, the audit report date to state filing date component appears to have a slightly stronger association (in terms of statistical significance) with general obligation bond interest costs.Research limitations/implicationsTo our knowledge, Illinois is the only state that provides a date stamp on when municipalities’ financial information is made publicly available on a centralized repository. As such we focus on municipalities in Illinois. While this increases the internal validity of our research, it potentially limits generalizability across other states. Also, as a reflection of the sample constraint, the number of observations in our study is relatively small. As part of post hoc analyses, we take a closer look at our sample, model and variables used to test our hypothesis.Practical implicationsFor stakeholders, each component of a constrained filing period may provide unique information. For example, the time period between an audit report date and a regulated filing date may send a positive signal about the quality of financial management to investors. For regulators, requiring some sort of centralized public access to municipal financial reports that have transparent time constraints may help states provide stronger governance and help lower municipalities’ borrowing costs.Originality/valueWe use a novel approach (with the Illinois date stamp filing information) to examine our research question. Most prior research has often relied on an assumption that the time between fiscal year-end and the audit report date is the component of time that provides useful information to investors (e.g. Henke and Maher, 2016). In our setting, we explore and find that a component of a constrained filing time period (i.e. the date from an audit filing to a required public accessibility filing) may also provide impactful information to investors.

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“…Bloch's (2016) survey demonstrates that municipal analysts consider the MD&A to be the most beneficial required component of GASB 34's financial reporting model improvements (except when the MD&A contains boilerplate information). As the Dodd–Frank Act of 2010 increased the registration and transparency requirements regarding municipal bond advisors, Ivonchyk (2019) notes a decrease in interest costs postimplementation. As well, underwriting fees can increase when a bond issuance does not engage a financial manager (Luby and Moldogaziev, 2013).…”

Section: Literature Review and Hypothesesmentioning

confidence: 99%

Linguistic tone of management discussion and analysis disclosures and the municipal debt market

Rich¹,

Roberts²,

Zhang³

2021

JPBAFM

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PurposeAs the management discussion and analysis (MD&A) section contains discretionary narrative disclosures regarding a government's yearly financial changes and status, the authors investigate several municipal debt market consequences of linguistic tone within these disclosures.Design/methodology/approachThe authors textually analyze municipal MD&As with Linguistic Inquiry and Word Count (LIWC) software and develop narrative tone measures based on existing financial-specific dictionaries. Using a final sample of 446 municipal bond issuances from 2012 to 2016, the authors modify the current bond regression models to examine the association between MD&A disclosure tone and future bond interest costs or rating disagreements.FindingsThis study’s empirical analysis suggests that more negative MD&A tone is associated with higher future debt costs and greater future disagreements among bond rating agencies.Practical implicationsOverall, the evidence implies that municipal bond stakeholders use the information in narrative disclosures when evaluating risk, but that the qualitative nature can introduce differences in interpretation between users. Furthermore, additional training in MD&A writing and further standard guidance in MD&A disclosures could improve the MD&A's informativeness for bond market decision-making and state-level monitoring.Originality/valueThis study is first to incorporate narrative tone measures into bond models in a governmental context.

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The Impact of Dodd–Frank on True Interest Cost of Municipal Bonds: Evidence From California

Cited by 4 publications

References 31 publications

Capital appreciation bonds and the cost of borrowing

Capital appreciation bonds and the cost of borrowing

Regulated public accessibility to municipalities’ financial reports and bond interest cost

Linguistic tone of management discussion and analysis disclosures and the municipal debt market

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