Comparative costs of negotiated versus competitive bond sales: new evidence from state general obligation bonds

This study examines the factors that affect the borrowing costs of state governments with specific attention being paid to the impact of state structural deficits (or fiscal imbalances) on borrowing costs. The findings for 1999-2000 suggest that interest costs for state competitively sold municipal securities reflect estimates of state structural deficits. States with a higher structural deficit were found to pay significantly higher interest costs. The evidence implies that bond ratings do not fully reflect the fiscal problems faced by state governments.

Section: The Determinates Of Municipal Interest Costmentioning

confidence: 92%

Structural Deficits and State Borrowing Costs

Benson

Marks

2007

“…Investment banks that wish to provide the requisite capital submit bids, and in most cases the firm that bids the lowest interest rate gets the business. Provided there is sufficient competition, competitive bids are associated with lower borrowing costs (Kriz ; Peng and Brucato ; Robbins and Simonsen ).…”

Section: Model Specificationmentioning

confidence: 99%

Internal Control Deficiencies and Municipal Borrowing Costs

Park¹,

Matkin²,

Marlowe³

2016

“Internal controls” refer to organizational rules and procedures used to safeguard assets and to detect fraud, waste, and abuse. This study examines the relationship between internal control deficiencies and municipal bond borrowing costs. The most severe form of internal control deficiencies (i.e., material weaknesses) is associated with higher borrowing costs for municipal bonds, between 10 and 18 basis points. Credit ratings mediate some of the effect of material weaknesses in internal controls but the indirect effect is relatively small. The effect of internal control deficiencies on borrowing costs was consistent in the time period before and after the financial crisis.

“…Method of sale refers to whether a bond is issued by competitive bidding process or via a negotiated contract. In interest cost studies, competitively bid bonds are generally associated with lower interest costs although more recent research has challenged this finding for more complex bond issues (Simonsen and Robbins 1996;Simonsen, Robbins, and Helgerson 2001;Kriz 2003;Robbins and Simonsen 2007;Marlowe 2009). Interest costs are sensitive to the number of bids submitted in a competitive sale (Hsueh and Liu 1990).…”

Section: Issue and Issuer Characteristicsmentioning

confidence: 99%

Determinants of the Credit Rating Fee in the Municipal Bond Market

Ely¹,

Martell²,

Kioko³

2013

Improving transparency of prices paid by government can improve market and government efficiency. Governments regularly pay to access capital markets, yet municipal bond issuance costs remain largely hidden from public view. This study examines factors associated with credit rating fees using a decade of Texas municipal bond issuance data. We find that rating fees are lower in a competitive environment, when issuers have experience and a relationship with the rating agency, and higher when the issue is large and more complex. The findings provide evidence that credit rating agencies (CRAs) retained pricing power following the credit crisis despite reduced reputational quality.