Studies on the determinants of municipal bond ratings contain two conspicuous patterns: the use of financial accounting variables and the application of discriminant analysis to them. Over 70 different financial accounting variables have been specified, leading to different findings across the studies. In addition, discriminant analysis has been applied in these studies without correcting for violations of its underlying assumptions. Akaike's information criterion and Lachenbruch's U method are used to show how a probit model specified with economic base diversification, economic expansion, and fiscal management variables may be an improvement over the application of discriminant analysis to financial accounting variables in the determination of a triple A bond rating.

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Recent research suggests that the individual investor can build stock portfolios that outperform broad market indices. Based on this research and on evidence supporting the persistence of mutual fund performance, we test whether or not the individual investor can build market-superior portfolios from stocks selected from the top holdings of Morningstar’s ten-year, five-star general equity mutual funds. We use modern portfolio theory to construct the portfolios. Although the portfolios tend to outperform the S&P 500 for the 1990s, we conclude that the evidence is not strong enough to recommend this stock selection strategy to the individual investor. © 2000 Elsevier Science Inc. All rights reserved.

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Do variables that measure economic base diversification, market expansion, population growth, and energy endowment affect municipal bond ratings? To examine this question, we specify and test a linear probability model of changes in municipal bond ratings related to changes in these variables. Using county data for 49 urban areas for 1970 and 1981, we find that changes in each of the variables strongly influence changes in municipal bond ratings . The results suggest that municipal officials and investors can determine the credit condition of a municipality more accurately by using these variables than by using financial accounting variables . The results also indicate that the ratings can represent a unique, market evaluation of the success of local economic development efforts .