Information transparency and pricing in the municipal bond secondary market

This study examines whether the proliferation of new information sources about municipal issuers during the 1990s, including annual financial disclosures required by the SEC under its revised Rule 15c2-12, has resulted in greater information transparency and improved pricing in the municipal bond secondary market. Unlike the corporate equity and bond markets, the secondary market for municipal bonds has suffered from a lack of frequent and timely disclosures of issuer-specific information. Prior accounting research, using data from the 1980s (e.g., Ingram, R.W., Raman, K.K., Wilson, E.R., 1989. The information in governmental annual reports: A contemporaneous price reaction approach. The Accounting Review 64 (2), 250–268; Ingram, R.W., Wilson, E.R., 1999. Information intermediation and seasoned municipal bond yields. Research in Governmental and Nonprofit Accounting 10, 1–31; Reck, J.L., Wilson, E.R., Gotlob, D., Lawrence, C., 2004. Governmental capital markets research in accounting: A review, extension, and directions for future research. Research in Governmental and Nonprofit Accounting 11, 1–33), found that the prices of seasoned bonds (those already trading in the secondary market) primarily adjust to information disclosed at the time of subsequent new bond issues of the same entity. Our comparative empirical analysis using data from both the 1990s and 1980s suggests that seasoned bond prices now impound information throughout the year rather than just adjusting to information disclosed in connection with new issues. This finding is consistent with the rapid proliferation of alternative information sources during the past decade. Our results provide no direct evidence, however, that secondary market prices react to the disclosures required by the SEC since 1995.