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The Effect of Tax Abatement Disclosure on Municipal Financing
Preprint   Open access

The Effect of Tax Abatement Disclosure on Municipal Financing

Lei Li, Liwei Weng, Jaron H. Wilde and Cheng Zeng
SSRN Electronic Journal
2023
DOI: 10.2139/ssrn.4631817
url
https://doi.org/10.2139/ssrn.4631817View
Preprint (Author's original)This preprint has not been evaluated by subject experts through peer review. Preprints may undergo extensive changes and/or become peer-reviewed journal articles. Open Access

Abstract

Local governments’ use of business tax incentives (abatements) is an economically significant, if controversial, practice. But understanding of how abatements affect governmental financing costs is limited. While mandatory disclosures of local government abatements could mitigate information asymmetry and enhance monitoring of their use, they could also reveal unfavorable information about how (or how much) governments use them, leading to investor backlash. We exploit the recent adoption of GASB standard 77, which requires local governments following GAAP to disclose information about tax abatements, to investigate whether and how mandatory abatement disclosures affect municipal financing costs. Our difference-in-differences analyses suggest that the adoption of GASB 77 is associated with significant decreases in the cost of bonds issued by treated counties. This effect is more pronounced in counties with higher (lower) information asymmetry (public and regulatory monitoring). Further analysis reveals that treated counties experience increases in GDP growth and decreases in unemployment, consistent with public disclosures helping discipline tax abatement decisions. Overall the results provide compelling evidence regarding the economic benefits of governmental tax incentive transparency.

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