The market reaction to the information content of municipal surplus/deficit ratios

The purpose of this project is to analyze the information content of municipal bottom line ratios. Previous studies obtained conflicting results. The sample consists of 490 general obligation bonds issued by Minnesota cities from 1977-1983. The dependent variable is the log of net interest cost, a primary market interest rate measure. A base model-additive regression approach is used where the independent variables include market and related factors plus alternative definitions of the bottom line. A three-year average ratio of extended spending rate (revenues/all expenditures items) is the only significant bottom line definition (at 0.01, based on a t-test). There is no evidence of an interaction effect between this bottom line measure and bond ratings.