This study investigates whether qualified/adverse audit opinions on the fairness of the financial statements impact market yields for city/county general obligation bonds. Although state and local governments represent a significant part of the U.S. economy, the value of external assurance in this market is questionable given the untimely nature of municipal audit reports. We find evidence consistent with municipal bond market participants penalizing counties and local governments with qualified/adverse audit opinions for both primary market issuances and secondary trading. For example, in a propensity score matched sample, we find that, on average, primary market yields are higher by 34 higher basis points for municipalities receiving qualified/adverse audit opinions. Our primary market findings hold for two matched samples (attribute and propensity score), a within-sample analysis, and a number of robustness tests. The results suggest that municipal investors value the information content of an independent audit report.

Data Availability: Data are available from the public sources cited in the text.

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