Financial statement timeliness and bond‐price dispersion in the municipal market

Disclosure regulations in the municipal market have incurred an interesting policy debate. Many believe that the regulations are good but that they do not go far enough. Prior studies found that after the establishment of electronic municipal market access (EMMA), market efficiency has increased. This study aims to further investigate how EMMA disclosure exactly removes information asymmetry and improves price formation in the municipal markets. Our analysis indicates a significant lack of financial statement timeliness even after EMMA's establishment. To measure timeliness, we use information staleness (total information delay) that we segregate into filing delay and postfiling delay. We find that the closer the financial statement filing to the issuance of a new bond (postfiling delay), the lower the bond‐price dispersion. The association holds only if the bonds are traded by both small and large investors, confirming the notion that disparate access to information causes information asymmetry in the municipal market. Regulatory efforts to improve the timeliness of financial information will thus reduce the information asymmetry, enhancing the municipal market efficiency. Applications for Practice The average total information delay on EMMA is 377 days, the average filing delay is 221 days, and the average postfiling delay is 156 days. These numbers indicate some bonds are traded in the municipal market with chronic information deficiency. Fling delay is not associated with bond‐price dispersion, while bonds with longer postfiling delays have higher bond‐price dispersions. There is an information asymmetry between small and large investors, which may be reduced by improving information timeliness in the municipal market.