The Association between Municipal Accounting Information and Bond Rating Changes

Abstract

Considerable controversy exists regarding the usefulness of municipal accounting information. Efforts to modify the present reporting framework for municipalities are predicated upon assertions that the information is not timely, reliable, and/or otherwise useful. In this study, we examined the association between municipal bond rating changes and accounting information to assess (1) whether municipal accounting measures available prior to a bond rating change are useful for predicting the change, and (2) whether municipal accounting measures available subsequent to the rating change reflect the economic conditions which induced the change in ratings. Results are eunbiguous for objective (1) but supportive of objective (2). These results provide additional insights into the use of accounting information by bond rating agencies and into the correspondence between rating agency assessments of municipal quality attributes and Jissessments obtained from accounting numbers. Such considerations are important to creditors who wish to predict rating changes, since few alternative sources of information for assessing municipal bond risk are available, and to commercial bank investment portfolio managers, who face regulatory constraints on the quality of issues within their portfolios.'