ABSTRACT
We investigate the managerial incentives and debt cost effects associated with budget-to-actual variance disclosures required by the GASB No. 34 reporting model. Empirically, we document associations between variances and municipal bond ratings in a sample of large U.S. cities over the period 2003–2006. We find a disproportionate share of favorable variances for revenues, expenditures, and the net (i.e., surplus/deficit). Further, we show that revenue variances in either direction are associated with lower bond ratings, i.e., precision is important in predicting revenues. In contrast, favorable expenditure variances are associated with higher bond ratings, i.e., imprecision may be tolerated if the variance is favorable. These associations exist despite indirect evidence of managerial incentives to create budgetary slack for both revenues and expenditures. The findings suggest that these disclosures required in the GASB No. 34 financial reporting model indicate factors that influence municipal debt costs.
Levered-Beta and Cost of Capital Sensitivities: An Experimental Investigation in Capital Structure
