The complexity yield puzzle : a textual analysis of municipal bond disclosures

Michael Farrell (University of Wisconsin-Milwaukee), Dermot Murphy (University of Illinois at Chicago), Marcus Painter (Saint Louis University), Guangli Zhang (Saint Louis University)

We study the effect of official statement textual complexity on municipal borrowing costs (yield) through the clientele channel. Theoretically, complexity reduces signal quality for unsophisticated investors, potentially increasing yield. We provide causal evidence of an economically significant complexity-yield premium that is especially large for issues with greater tax-induced exogenous demand from unsophisticated investors or less complementary information from rating agencies. We decompose complexity into multiple topics and find that "legal complexity" matters most for the complexityyield premium. Despite this premium, complexity has been trending upward across all credit categories. This trend is attributable to increased regulatory enforcement from the SEC.

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Year of publication:	[2023]
Authors:	Farrell, Michael ; Murphy, Dermot ; Painter, Marcus ; Zhang, Guangli
Publisher:	Chicago, IL : Stigler Center for the Study of the Economy and the State, University of Chicago Booth School of Business
Subject:	municipal bonds \| disclosure \| complexity \| textual analysis \| clientele \| Kommunalobligation \| Municipal bond \| Unternehmenspublizität \| Corporate disclosure \| Öffentliche Anleihe \| Public bond \| Kommunalverschuldung \| Municipal debt