Market Structure Versus Information Costs as Determinants of Underwriters' Spreads on Municipal Bonds

Higgins, Wayne; Moore, Basil J.

doi:10.2307/2979020

Cited by 9 publications

(7 citation statements)

References 6 publications

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“…To isolate the effect of CRC, we control for both bond issue features and county-level characteristics that have a bearing on underwriting spread. BondAttributes represents a vector of bond features such as issue size, maturity, issue credit risk, a dummy for general obligation bond, a dummy for bond sold through negotiated sale, a dummy for the callable bond, and a dummy for credit enhanced bond (e.g., Butler et al, 2009;Joehnk and Kidswell, 1984;Higgins and Moore, 1980). 3 In addition, we control for underwriter reputation and whether the bond issue was underwritten by a minority underwriter.…”

Section: Model Specificationmentioning

confidence: 99%

Is There a Racial Bias in Underwriter Fees? Evidence from U.S. County Government Bond Issuance

Abakah¹,

Li²

2022

Public Finance and Management

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This paper investigates whether racial disparities in underwriter fees exist. Using tax-exempt bonds issued by U.S. County governments, we find that underwriting spread increases with increasing county's black-to-white population ratio. The result holds after using instrumental-variable 2-stage least squares regression to address potential endogeneity concerns. Further analysis shows that the bond issuerâ€™s financial constraints drive our result. In other words, lower levels of wealth and higher levels of financial distress of the issuing municipality explain the racial bias in underwriting spread. We also document that the observed racial bias is mitigated when there is a higher local market competition among underwriters.

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Section: Model Specificationmentioning

confidence: 99%

Is There a Racial Bias in Underwriter Fees? Evidence from U.S. County Government Bond Issuance

Abakah¹,

Li²

2022

Public Finance and Management

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“…The independent variables considered to be important in explaining the variation in the costs of an issue reflect characteristics of the issue, the issuer, and the market. Previous studies [5,6,9,13,14, 151 indicate that issue size, maturity structure, whether the issue is competitively bid or negotiated, whether the issue consists of general obligation or revenue bonds, and whether the issue has a call provision are characteristics of the issue which affect the cost of the issue. The same studies suggest that bond ratings and the market rate of interest are major determinants of issuer cost.…”

Section: The Modelmentioning

confidence: 99%

The Effect of Private Municipal Bond Insurance on the Cost to the Issuer

Braswell

Nosari

Browning

1982

The Financial Review

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In recent years, the volume of municipal bond financing has increased dramatically. This, in conjunction with soaring interest costs and a perhaps strengthened awareness of risk by investors, has created a need for municipalities to curtail borrowing costs. One means by which municipalities have attempted to accomplish this goal is through the purchase of municipal bond insurance. Three firms offer private municipal bond guarantees at substantial premiums. It is their claim that municipalities can gain interest cost savings in excess of the fee paid for coverage.Municipal bond insurance assures timely and full payment of interest and principal to investors in the event of default by the issuer. Demand for this type of insurance has grown significantly since 1975. The actual amount by which borrowing costs are reduced, however, is largely unknown, since very little empirical evidence has been examined to determine the actual interest cost savings of municipal bond insurance. To date, only three empirical studies [3, 4, 71 have attempted to quantify the interest cost savings of private municipal bond insurance. Of these studies, none is comprehensive, nor are any firm conclusions derived. Each study attempts to accomplish a different goal, consequently there is very little collaborating evidence among them. As a result, the value of municipal bond insurance is unclear.This study uses a regression model to empirically investigate the effect of insurance on the true interest cost (TIC) to the issuer. The T I C of the issue serves as the dependent variable with independent variables reflecting characteristics of the issue, the issuer, and the market. The effect of municipal bond insurance on the cost to the issuer is captured by a dummy variable. This paper is presented in four sections. Private municipal bond insurance is discussed in Section I. Section I1 contains a presentation of the model, and the empirical results are presented in Section 111. O u r conclusions are summarized in Section IV.

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“…He used type of issue, issue size, prior issues outstanding, rating, call status, and average maturity to capture issue-specific and issuer-specific characteristics. 2 Kessel (1971) and Higgins and Moore (1980) provided substantial evidence that bond issuers benefit from greater competition for municipal bond issues. The number of bids has been shown to reduce significantly borrowing cost in numerous studies.…”

Section: Prior Related Researchmentioning

confidence: 99%

“…The attractiveness of particular bond issues to underwriters depends largely on three factors (Kessel, 1971;Higgins and Moore, 1980): underwriting costs, perceived risks, and market structure. Broadly defined, underwriting costs include the bid price underwriters pay for the bonds, the direct and indirect costs of forming syndicates, and information search costs related to marketing the issue.…”

Section: Prior Related Researchmentioning

confidence: 99%

Municipal financial reporting and competition among underwriters for new issues of general obligation bonds*

Wilson

Stewart

1990

Contemporary Accting Res

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Abstract. This study develops and tests the hypothesis that the quality and quantity of municipal financial information are positively associated with increased competition in the primary market for tiew issues of getieral obligation bonds. A measure of market competitioti, the number of utiderwriter bids tendered, is regressed on several market-related atid issue-specific control variables and a group of financial reporting test variables. A sample of 224 new issues of municipal general obligation bonds sold by competitive bid between 1978 and 1983 is examined. The results generally support the hj^othesis. Employment of an independent CPA firm auditor and more extensive disclosure increase competition, as expected. However, no support was found for the argument that holding a Government Finance Officers Association Certificate of Conformance increases the level of underwriter competition. IntroductionThis study develops and tests the hypothesis that the quality of municipal financial reporting is linked with the level of underwriter competition for new issues of general obligation (GO) bonds. The number of underwriters tendering bids for the new issue is used to proxy for underwriter competition. Kessel (1971) provides evidence that the number of underwriters bidding for a new issue is a

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Market Structure Versus Information Costs as Determinants of Underwriters' Spreads on Municipal Bonds

Cited by 9 publications

References 6 publications

Is There a Racial Bias in Underwriter Fees? Evidence from U.S. County Government Bond Issuance

Is There a Racial Bias in Underwriter Fees? Evidence from U.S. County Government Bond Issuance

The Effect of Private Municipal Bond Insurance on the Cost to the Issuer

Municipal financial reporting and competition among underwriters for new issues of general obligation bonds*

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