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Abstract: 

This study examines the influence of institutional mechanisms of state fiscal transparency on municipal bond issuance borrowing costs. It tests two hypotheses drawn from David Heald’s (2003) tradeoff: (1) fiscal transparency brings the value of “sunlight” and (2) the risk of “overexposure.” The hypotheses are tested using the Fiscal Transparency Index, a measure widely used in political science, and true interest costs for a sample of states (1986–2012). The results reveal that initially, as fiscal transparency increases, borrowing costs fall. There is a point, however, where additional transparency leads to increased borrowing costs.

Keywords: Municipal bonds, bond issuance, borrowing cost, fiscal transparency, fiscal transparency index

Affiliations:  1: Texas State University; 2: Texas State University; 3: Midwestern State University.