Should State Governments Prohibit the Negotiated Sales of Municipal Bonds?

53 Pages Posted: 6 Aug 2020 Last revised: 12 Nov 2020

See all articles by Dario Cestau

Dario Cestau

IE Business School, IE University

Richard C. Green

affiliation not provided to SSRN

Burton Hollifield

Carnegie Mellon University - David A. Tepper School of Business

Norman Schürhoff

University of Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Date Written: December 22, 2019

Abstract

Should legislation ban the negotiated sales of municipal bonds? What are the costs of forcing public auctions? We compare the offering yields of local governments that are forced by state law to use public auctions to the offering yields of local governments that can choose between auctions and negotiated sales. Using a sample of 369,482 school bonds issued between 2004 and 2014, we find that a restriction on negotiated sales has a negative cost instead of positive. The prohibition benefits issuers on average. The offering yields of constrained issuers are 17 basis points lower than the offering yields of unconstrained issuers. The effect is equivalent to a rating upgrade from non-rated to AA-. Nevertheless, most issuers prefer to use negotiated sales even if they do not maximize bond proceeds.

Keywords: Primary market, state laws, book building, auctions, municipal bonds

JEL Classification: H3, H7, G1

Suggested Citation

Cestau, Dario and Green, Richard C. and Hollifield, Burton and Schürhoff, Norman, Should State Governments Prohibit the Negotiated Sales of Municipal Bonds? (December 22, 2019). Available at SSRN: https://ssrn.com/abstract=3508342 or http://dx.doi.org/10.2139/ssrn.3508342

Dario Cestau (Contact Author)

IE Business School, IE University ( email )

Calle Maria de Molina 12, Bajo
Madrid, Madrid 28006
Spain

Richard C. Green

affiliation not provided to SSRN

Burton Hollifield

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
(412) 268-6505 (Phone)
(412) 268-6837 (Fax)

Norman Schürhoff

University of Lausanne ( email )

Extranef 228
CH-1015 Lausanne
Switzerland
+41 (0)21 692 3447 (Phone)
+41 (0)21 692 3435 (Fax)

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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