GASB 34's Information Relevance: Evidence from New Issue Local Government Debt

Abstract

I examine the relevance to credit analysts and investors of information presented in the government-wide financial reports of municipalities. Government-wide, accrual-basis measures such as those required by GASB Statement 34 are potentially useful for assessing local government credit quality and pricing local government bonds because most local governments have capital-intensive infrastructure assets. I examine information relevance in the context of municipal bond credit analysis, primary market pricing, and secondary market pricing of new issue municipal bonds. I find that government-wide financial information does have incremental value relative to traditional fund-based measures. However, I also find that fund-based measures are far more relevant for assessing default risk and for pricing new issue municipal bonds. The clearest evidence of information relevance of the government-wide information for pricing efficiency in the secondary market. These results have implications for our understanding of the implications of accrual-basis accounting in US governments.