The Information Content of Government Financial Disclosure

Using textual analysis methods, we investigate the information content of government financial disclosure and its implications. Specifically, we establish several stylized facts using the comprehensive annual financial reports (CAFRs) issued by municipal entities. We first document large differences between government and corporate disclosures. For example, municipal issuers are less likely to be distorted by opportunistic incentives in choosing the language. We then construct traditional textual measures (e.g., sentiment and financial constraint) commonly used in the corporate disclosure research to proxy for government administrative conditions. Their strong predictive power of the cost of borrowing, economic growth, and financing and investment behaviors of the local governments confirms the value of government financial disclosure in the financial markets. However, we also examine the financial market reaction to CAFRs and find that investors react slowly to most of the text-based signals in CAFRs, suggesting that this important information channel is not fully utilized by market participants. Our study supports the bondholder protection policies through improving the quality of government disclosure.