Distance Still Matters: Evidence from Municipal Bond Underwriting

Abstract

Using a sample of municipal bond offerings, I find that "local" investment banks have substantial comparative and absolute advantages over non-local counterparts - locals charge lower fees and sell bonds at lower yields. Local investment banks' strongest comparative advantage is at underwriting bonds with higher credit risk and bonds not rated by rating agencies. These findings suggest that high risk bonds and non-rated bonds are more difficult to evaluate and market, and that investment banks with a local presence are better able to assess "soft" information and place difficult bond issues.

Keywords: municipal bonds, investment bank fees, local underwriters, soft information, geography

JEL Classification: G24, G28, M41, M45