Consequences of GAAP Disclosure Regulation: Evidence from Municipal Debt Issues

Abstract

We compare characteristics of municipal debt issues in states that mandate GAAP for municipalities with issues in states that impose no annual financial disclosure requirements. Cross‐sectional comparisons indicate that the use of public (versus private) debt is greater, and municipal debt costs are 14 to 25 basis points lower, in states where GAAP is mandated. Moreover, municipalities in states that impose the GAAP requirement realize lower debt costs following the effective date of the regulation. These results suggest that GAAP requirements reduce municipal borrowing costs. More generally, the evidence indicates that financial reporting regulation reduces contracting costs between borrowers and lenders.