Effective & Effectively Trading Information: Exploring the Extent to Which Continuing Disclosures Affect the Secondary Market for Municipal Securities

Abstract

One of the biggest puzzles that financial professionals are constantly trying to piece together is the one that determines which factors inform and influence investor decisions. Since nobody can predict future events, financial professionals have relied upon historical data and trends to make educated predictions in order to best serve their clients and ultimately make a profit. An understanding of particular events and the way in which they have influenced investors can often indicate how a similar event in a similar environment will influence the market. Of all the financial markets, the municipal securities market can often fade into the back- ground - one does not typically see the CUSIPs of issuers in bright lights in Times Square like tickers on the New York Stock Exchange. It is true; buying and selling shares in a company with any number of clever financial instruments can be far more appealing to the average investor than the prospect of buying municipal securities from underwriters and optionally buying or selling them on the secondary market. The equities market can be extremely volatile, providing opportunities to make enormous profit, and the transparency and availability of data can allow for any smart investor to make calculated decisions. However, I would argue that the municipal securities market, though a bit underrated and not as well-studied, holds financial promise as well. Investors hold approximately $3.7 billion of municipal debt [31], so there is plenty of money to be made in a risk-averse way if investors are watching the market. Theoretically, a disclosure of information made by an issuer should influence an investor’s decision to buy or sell associated municipal securities. According to the SEC, “Continuing disclosure consists of important information about a municipal bond that arises after the initial issuance of the bonds. This information generally reflects the financial health or operating condition of the state or local government as it changes over time, or the occurrence of specific events that can have an impact on key features of the bonds” [25]. In recent years, extensive efforts have been made by the Municipal Securities Rulemaking Board (MSRB) to increase transparency and the availability of information regarding these disclosures, most notably through their online Electronic Municipal Market Access service (EMMA). Despite this exertion to make disclosure data publicly available, a certain level of doubt remains in the industry, specifically amongst lawyers, bankers, and municipal advisers. Do investors really trade based upon this now more readily available disclosure information, and if they do, to what extent and based on which type of disclosure? This thesis will attempt to answer this very question as it applies to municipal securities in Northeast Ohio.