Infrastructure Asset Reporting and Pricing Uncertainty in the Municipal Bond Market

We examine the infrastructure provision of the GASB's Statement No. 34 to determine whether there is unique information content in the modified approach versus traditional depreciation, both allowable under this provision. Using a dataset containing investor bid spreads on secondary market bond auctions from states using the modified approach as well as those from states using traditional depreciation, we find bonds from modified approach states have significantly narrower bid spreads than bonds from traditional depreciation states, indicating the modified approach provides unique information about governments' financial condition. Findings suggest the modified approach reduces uncertainty about infrastructure condition, improving market efficiency.