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The Role of Credit Rating Changes on Opacity in the Municipal Bond Market

This paper examines the role of credit rating changes on municipalities’ disclosure decisions. Using Moody’s recalibration of their municipal ratings scale in 2010 as an exogenous upgrade to municipal credit ratings, we find that upgraded municipalities significantly reduced their disclosure of financial statements relative to unaffected municipalities. Consistent with rating upgrades decreasing municipal issuers’ cost of capital and reducing the benefits of disclosure, we find that this reduction is greater for issuers with lower ex-ante financing capacity, larger disclosure costs, and greater ex-ante investor reliance on disclosure. These findings suggest that borrowers take investors’ reliance on credit ratings into account in their disclosure decisions. Collectively, our results suggest that higher ratings can reduce the transparency of debt issuers’ information environments by reducing borrowers’ incentives to disclose financial information.