Knowledge that Transforms

The municipal bond market has long been criticized for its lack of disclosure, which prior research often attributes to weak regulatory oversight. We offer another explanation: tax clienteles. Most municipal bonds are tax-exempt, and thus primarily attract high-tax retail investors, who may lack the incentive or ability to demand or monitor disclosures. In contrast, taxable bonds attract a broader investor base, including institutional investors who can demand disclosure. We find that issuers provide more continuing disclosures in years with taxable bonds outstanding relative to years without. Issuers also increase disclosures after issuing their first taxable bond and decrease disclosures after calling their last taxable bond. Exploiting a tax law change, we find that disclosures increase following plausibly exogenous increases in taxable bond issuances. Our results suggest that the tax clienteles for municipal bonds affect issuers’ disclosure practices and can inform those concerned with disclosure noncompliance in the municipal bond market.

ABSTRACT This study investigates whether auditors incorporate investor information demand when determining key audit matter (KAM) disclosures. We measure investor information demand using a unique dataset of investor inquiries submitted through investor interactive platforms (IIPs) established by the China Securities Regulatory Commission. At the topic level, we find that auditors are more likely to disclose a given topic as a KAM when investors raise more inquiries on that topic. At the aggregate level, a higher proportion of inquiries devoted to accounting issues is associated with both a greater number of KAMs and longer KAM disclosures. Importantly, following the introduction of KAM reporting, managers’ footnote disclosures become more aligned with heightened investor inquiries, reinforcing our interpretation that the documented effects reflect auditors’ responses to investor inquiries rather than merely mirroring managerial disclosure changes. Overall, our findings suggest that auditors incorporate investor information demand into KAM disclosures.