IDEAS home Printed from
   My bibliography  Save this article

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


  • Kenneth Daniels
  • Demissew Diro Ejara


Problem statement: There is a significant difference between the interest rates on the GO and the RV municipal bonds. We sought explanation for this difference in differences in information asymmetry between the two types of municipal bonds. GO bonds finance general municipality expenditures and repayment is from general tax revenues. RV bonds finance special projects and repayment is from cash flows of the special projects. These projects are assumed to be more asymmetric than the general municipality tax revenues. Previous studies examined this issue but did not explicitly consider the information asymmetry differences. Approach: We used issue transaction spread as a proxy for information asymmetry. Average spread for RV bonds is 1.172% while that for GO bonds is 0.892%. We controlled for external economic factors, issue and issuer features and contractual terms that might affect yield on debt. We used two-step regression analyses to explain yields on the two types of municipal bonds. Results: RV bonds cost 74 basis points more on the average than GO bonds. After controlling for external economic factors, issue and issuer features and contract terms, the difference shrank to an average of 44 basis points. Issue transaction spread, our proxy for information asymmetry and credit rating were important determinants of bond yields. Conclusion/Recommendations: Issue transaction spread, as a proxy for information asymmetry, explained differences in bond yields. Other variables that affect yield differences were credit rating, maturity, economic activities, contract terms and other issue and issuer features. Still, there remained an unexplained difference in the yields between RV and GO bonds of 44 basis points that we left for further research. This difference was inversely related to the credit rating of the bond.

Suggested Citation

  • Kenneth Daniels & Demissew Diro Ejara, 2009. "Impact of Information Asymmetry on Municipal Bond Yields: An Empirical Analysis," American Journal of Economics and Business Administration, Science Publications, vol. 1(1), pages 11-20, March.
  • Handle: RePEc:abk:jajeba:ajebasp.2009.11.20
    DOI: ajebasp.2009.11.20

    Download full text from publisher

    File URL:
    Download Restriction: no

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Allen N. Berger & Marco A. Espinosa‚ÄźVega & W. Scott Frame & Nathan H. Miller, 2005. "Debt Maturity, Risk, and Asymmetric Information," Journal of Finance, American Finance Association, vol. 60(6), pages 2895-2923, December.
    2. Liu, Pu & Thakor, Anjan V, 1984. "Interest Yields, Credit Ratings, and Economic Characteristics of State Bonds: An Empirical Analysis: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(3), pages 344-351, August.
    3. Kidwell, David S & Koch, Timothy W, 1982. " The Behavior of the Interest Rate Differential between Tax-Exempt Revenue and General Obligation Bonds: A Test of Risk Preferences and Market Segmentation," Journal of Finance, American Finance Association, vol. 37(1), pages 73-85, March.
    4. Richard West, 1964. "New Issue Concessions on Municipal Bonds: A Case of Monopsony Pricing," The Journal of Business, University of Chicago Press, vol. 38, pages 135-135.
    Full references (including those not matched with items on IDEAS)


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:abk:jajeba:ajebasp.2009.11.20. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jeffery Daniels). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.