On the morning of November 3, 2023, the 23rd (total 184th) DUFE Accounting and Finance Forum was held at Tencent Meeting online as scheduled, and the forum invited Associate Professor Xi Chen from College of Business at University of Houston. Prof. Xi Chen shared an academic paper entitled "The Effects of Tax Clientele on Disclosure: Evidence from the Municipal Bond Market" with the students and teachers.
In stark contrast to the disclosure environment for publicly traded equities, the disclosure environment for municipal bonds has been widely criticized for its lack of transparency. Prior research has largely attributed the deficiencies in continuing disclosures from municipal bond issuers to a lack of disclosure regulation and weak enforcement. Professor Chen and her collaborators propose the tax clientele effect as another possible explanation and examine whether the taxability of municipal bond is associated with issuers’ disclosure practices. While individual investors form a primary tax clientele for tax-exempt municipal bonds, taxable municipal bonds are more likely to attract institutional investors, who generally have more incentives to demand and monitor disclosure. The analyses suggest that issuers provide more continuing disclosures in years with taxable bonds outstanding relative to years without. In addition, issuers provide more continuing disclosures in years when they issue a new taxable bond, and especially following the issuance of their first taxable bond. Given that tax-exempt bonds constitute the majority of municipal bonds outstanding, the findings suggest that the lack of disclosure in the municipal bond market may be partially attributable to a tax clientele effect.
The study by Professor Chen and her collaborators can inform regulators debating an increase in disclosure requirements for the municipal bond market and policy makers examining the externalities of the tax-exempt status afforded to municipal bonds. The report triggered strong resonance and lively discussion among the participating teachers and students.
