Does timeliness of financial information matter in the governmental sector?

The purpose of our study is to investigate whether the timeliness of annual financial statements included in an official registration statement impacts the initial yield and the initial rating of general obligation municipal bonds. Using hand-collected data from 1058 official registration statements, we find that total information delay, comprised of two component time periods (i.e., audit delay and post audit delay), is significantly associated with higher municipal debt costs and lower bond ratings. Our findings also support the prediction that municipal investors charge a larger risk premium for untimely information when default risk is high. Overall, our results suggest that future municipal bond studies should consider total information delay, rather than solely audit delay, when examining/controlling for the timeliness of governmental financial statements. Our findings also provide important empirical evidence supporting recent SEC and GASB initiatives to improve municipal reporting and disclosure, especially the need to develop interim financial reporting standards.