Evidence on the Importance of the Financial Reporting Function in Municipal Governments

We develop a database of the characteristics of the financial reporting function for all 482 California cities from 2013 to 2018, including the name and title of the individual who prepares the financial statements and the resources devoted to administrative duties. We find that financial reporting quality is associated with both the organizational design and the amount of resources devoted to the administrative function. Specifically, when the municipality employs a dedicated finance director, when the finance director simultaneously performs treasury responsibilities, and when the city devotes more resources to administrative salaries, municipalities provide disclosures that are of higher quality and generally benefit from a reduced cost of capital. Our findings are consistent across specifications that explore heterogeneity across and within cities, and after using extreme weather events as a source of plausibly exogenous variation in the municipal reporting function