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Accounting prof Rich publishes study on municipal interest rates

 

September 23, 2013

A new study co-authored by Dr. Kevin Rich, assistant professor of accounting, shows that local governments that file financial restatement disclosures are often later subjected to higher interest rates on publicly issued debt. This type of penalty is costly to taxpayers, Rich says.

The study, which is the one of the first to consider adverse consequences of financial reporting quality by municipal governments, further shows that such penalties are mitigated when the municipalities have strong audit oversight and citizens who are more actively engaged in the local legislative process.

“Let's say a city discloses a correction to a previously issued financial statement– a restatement – and then seeks debt financing,” Rich says. “Investors are looking at this restatement and asking, ‘How much can I count on the city’s reported numbers?’ Investors are going to price in some risk via increased interest rates.”

That risk, Rich says, is not insignificant – approximately 30 basis points, according to the study.

The evidence further suggests that municipalities are less inclined to issue debt following a financial restatement, and when they do, they appear to use secured debt first to give inventors a bit more comfort.

The paper, titled “Accounting restatements, governance and municipal debt financing,” will be published in the November/December issue of the Journal of Accounting and Economics. Rich collaborated with Drs. William Baber, Georgetown University; Angela Gore, The George Washington University; and Jean Zhang, Virginia Commonwealth University.