Impact of Information Asymmetry on Municipal Bond Yields: An Empirical Analysis

Abstract

This paper analyzes the differences in interest rate of GO and RV bonds. Empirical analyses show that RV bonds cost an average of 74 basis points over the GO bonds. We hypothesize that differences in information asymmetry influence these yield differences. We use spread as a proxy for information asymmetry. The difference in yields between RV and GO bonds decreases to about 44 basis points when we control for external economic variables, issuer and issue characteristics, including credit rating, spread, maturity, bid type, and other features. Consistent with our expectations, both credit ratings and spread have significant explanatory powers although they do not fully capture the differences between the two types of local government bonds. Abstract This paper analyzes the differences in interest rate of GO and RV bonds. Empirical analyses show that RV bonds cost an average of 74 basis points over the GO bonds. We hypothesize that differences in information asymmetry influence these yield differences. We use spread as a proxy for information asymmetry. The difference in yields between RV and GO bonds decreases to about 44 basis points when we control for external economic variables, issuer and issue characteristics, including credit rating, spread, maturity, bid type, and other features. Consistent with our expectations, both credit ratings and spread have significant explanatory powers although they do not fully capture the differences between the two types of local government bonds.