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Abstract
The purpose of this dissertation is to examine the role of credit outlooks as an important certification method to address information asymmetry and how credit outlooks are influenced or influence a variety of fiscal factors in major U.S. cities.
In the municipal bond market, there exists an information asymmetry between buyers and sellers. Issuers may not reveal the true quality of creditworthiness to investors, and investors may confront the loss of their investment due to a lack of information. To address this information asymmetry, financial intermediaries help investors reduce the transaction costs of assessing the market information. One of the prominent financial intermediaries is credit rating agencies, which provide credit quality measures for both bond issuers and issues. Among the credit quality measures, credit outlooks are often neglected in financial management theory and practice while credit ratings are considered as one of the essential factors. Credit outlooks provide significant information to the market, playing a monitoring and surveillance role as well as serving as a disciplining tool to the issuers. Therefore, this dissertation attempts to take credit outlooks into serious consideration as an important signal for all market participants and researchers.
To examine the role of credit outlooks, I tested the determinants of city credit outlooks focusing on intermediate changes in fiscal fundamentals. Then I tested the impact of city credit outlooks on the choice of method of sale and on the serial bond yields. I utilized all general obligation serial bonds issued by major cities in the U.S. between 2003 and 2012 that were rated by Moody’s. The findings show that significant changes from prior years and the deviation from the trend of fiscal fundamentals are associated with credit outlooks, while the levels themselves of fiscal fundamentals are not. The models on predicting method of sale show that market uncertainty increases the likelihood of selecting negotiated sales over competitive ones. The results of the two-stage least squares (2SLS) model show that potential risk of a downgrade in the intermediate term is effectively reflected in the interest costs.
In the municipal bond market, there exists an information asymmetry between buyers and sellers. Issuers may not reveal the true quality of creditworthiness to investors, and investors may confront the loss of their investment due to a lack of information. To address this information asymmetry, financial intermediaries help investors reduce the transaction costs of assessing the market information. One of the prominent financial intermediaries is credit rating agencies, which provide credit quality measures for both bond issuers and issues. Among the credit quality measures, credit outlooks are often neglected in financial management theory and practice while credit ratings are considered as one of the essential factors. Credit outlooks provide significant information to the market, playing a monitoring and surveillance role as well as serving as a disciplining tool to the issuers. Therefore, this dissertation attempts to take credit outlooks into serious consideration as an important signal for all market participants and researchers.
To examine the role of credit outlooks, I tested the determinants of city credit outlooks focusing on intermediate changes in fiscal fundamentals. Then I tested the impact of city credit outlooks on the choice of method of sale and on the serial bond yields. I utilized all general obligation serial bonds issued by major cities in the U.S. between 2003 and 2012 that were rated by Moody’s. The findings show that significant changes from prior years and the deviation from the trend of fiscal fundamentals are associated with credit outlooks, while the levels themselves of fiscal fundamentals are not. The models on predicting method of sale show that market uncertainty increases the likelihood of selecting negotiated sales over competitive ones. The results of the two-stage least squares (2SLS) model show that potential risk of a downgrade in the intermediate term is effectively reflected in the interest costs.