The interest rate effects of certification awards and underwriter types in the school district bond market

New school district bond issues in the U.S. have averaged nearly $50 billion for each of the past few years. Since bond issues are a major source of capital for school districts, the school districts have a strong incentive to minimize the interest costs associated with them. One option school districts have is to obtain financial statement certification from independent organizations. This certification provides assurance to buyers of the quality of financial reporting, which, in turn, should reduce risks that affect interest rates. We investigate differences in interest rates between school districts that provide financial statement certification and school districts that do not. When controlling for important factors that influence interest rates in a cross-sectional sample of school district bonds, we find that school districts that obtain certification end up paying, on average, higher interest rates. This implies that school districts with higher costs of capital are more likely to engage in costly activities to reduce information asymmetry, such as the certification of financial statements. The choice for certification is driven by rational behavior on the part of individual school districts, who attempt to minimize their financing costs prior to the bond offering. We also investigate the association between underwriter type and interest costs. We find evidence that interest costs are lower when the issue is lead-managed by regional underwriters.
INTRODUCTION Although the municipal securities literature has had difficulty articulating a theory of accounting relevance, the empirical results of several studies reveal a reasonable and statistical link between accounting variables [...]