The Information Content of Municipal Spending Rate Data

Abstract

The objective of this study was to further investigate whether the spending rates of municipalities, computed using publicly available accounting data, contain information useful to bond investors in assessing the relative riskiness of new municipal bond issues. Previous studies have provided conflicting evidence on this issue. For example, Wallace [1981] found significant association between spending rate and both net interest cost and bond ratings, but the sign of the regression coefficient in her model implied that reported general fund deficits are associated with lower interest cost, a finding which Wallace admits is counterintuitive. In a related study, Wilson and Howard [1984] examined the effects of surplus and deficit spending rates and found a negative association between spending rates and net interest cost. Ingram and Copeland [1982] found no significant association between spending rate (their ratio no. 24) and risk measures of bond yield premiums, beta, and changes in bond yield premiums. The same result (i.e., no association between spending rate and market measures) was obtained by Apostolou, Reeve, and Giroux [1984]. The results of the present study, in contrast, suggest that reported spending rates are associated with net interest cost but the association is not monotonic, with a change in direction of the slope occurring at the balanced-budget point (revenues equal expenditures). For the sake of consistency, spending rate (SR) is defined as (revenue/