Government-wide Financial Statements and Credit Risk

Now that state governments issue comprehensive annual financial reports in accordance with Statement No. 34 of the Governmental Accounting Standards Board, it is possible to generate a consistent and comprehensive set of government-wide financial information. We use the information to develop financial ratios to benchmark government financial performance from information beyond the traditional general fund, and test the hypothesis that such information is incorporated into the assessment of credit risk. We provide an empirical analysis of the incorporation of government-wide financial information into state government credit ratings, which provides a positive empirical test of the theory of certification and demonstrates how information from the government-wide financial statements is infused into financial markets.