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Financial Disclosure and Bond Insurance

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  • Gore, Angela K
  • Sachs, Kevin
  • Trzcinka, Charles

Abstract

Regulators typically assume that public financial disclosure is necessary for the efficient functioning of capital markets. Economists recognize that other mechanisms, such as insurance, can mitigate problems that occur when buyers have less information than sellers. We examine whether public financial disclosures and bond insurance are substitutes. Our data are from municipal issuers in Michigan, where financial disclosure is required by the state, and Pennsylvania, where disclosure is unregulated. We study municipal issuers because they are not covered by federal securities laws and state laws often allow issuers to choose the level of financial disclosure. Overall, we find that when disclosure is unregulated, issuers substitute between disclosure and insurance. When disclosure is required by state law, issuers use less insurance. Our results imply that required accounting disclosure is not necessarily optimal since rational issuers will trade off public disclosure and insurance when free to do so.

Suggested Citation

  • Gore, Angela K & Sachs, Kevin & Trzcinka, Charles, 2004. "Financial Disclosure and Bond Insurance," Journal of Law and Economics, University of Chicago Press, vol. 47(1), pages 275-306, April.
    • Handle: RePEc:ucp:jlawec:y:2004:v:47:i:1:p:275-306
    DOI: 10.1086/380472
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    Cited by:

    1. Yaxuan Qi & John Wald, 2008. "State Laws and Debt Covenants," Journal of Law and Economics, University of Chicago Press, vol. 51(1), pages 179-207, February.
    2. Nolan Kido & Reining Petacchi & Joseph Weber, 2012. "The Influence of Elections on the Accounting Choices of Governmental Entities," Journal of Accounting Research, Wiley Blackwell, vol. 50(2), pages 443-476, May.
    3. Cécile Carpentier & Douglas Cumming & Jean‐Marc Suret, 2012. "The Value of Capital Market Regulation: IPOs Versus Reverse Mergers," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 9(1), pages 56-91, March.
    4. Pei Li & Leo Tang & Bikki Jaggi, 2018. "Social Capital and the Municipal Bond Market," Journal of Business Ethics, Springer, vol. 153(2), pages 479-501, December.
    5. Benito Arruñada, 2011. "Mandatory accounting disclosure by small private companies," European Journal of Law and Economics, Springer, vol. 32(3), pages 377-413, December.
    6. Christine R. Martell & Robert S. Kravchuk, 2010. "Bond Insurance and Liquidity Provision: Impacts in the Municipal Variable Rate Debt Market, 2008-09," Public Finance Review, , vol. 38(3), pages 378-401, May.
    7. Natee Amornsiripanitch, 2022. "Bond Insurance and Public Sector Employment," Working Papers 22-03, Federal Reserve Bank of Philadelphia.
    8. Jacquelyn R. Gillette & Delphine Samuels & Frank S. Zhou, 2020. "The Effect of Credit Ratings on Disclosure: Evidence from the Recalibration of Moody's Municipal Ratings," Journal of Accounting Research, Wiley Blackwell, vol. 58(3), pages 693-739, June.
    9. Ma, Shuang & Gong, Yuexuan & Li, Ding, 2019. "Reform of the shareholding system for collective assets, residents' participation, and community debts risk," China Economic Review, Elsevier, vol. 58(C).
    10. Cuny, Christine, 2016. "Voluntary disclosure incentives: Evidence from the municipal bond market," Journal of Accounting and Economics, Elsevier, vol. 62(1), pages 87-102.
    11. Branko Stanic, 2018. "Determinants of subnational budget/fiscal transparency: a review of empirical evidence," Public Sector Economics, Institute of Public Finance, vol. 42(4), pages 449-486.

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