When the Thin Bench Gets Thinner: Investment Bank Consolidation and Municipal Finance

103 Pages Posted: 11 Jan 2024 Last revised: 3 Jul 2024

See all articles by Renping Li

Renping Li

Washington University in St. Louis - John M. Olin Business School

Date Written: January 8, 2024

Abstract

Do investment banks possess market power, and does their consolidation have anti-competitive effects? Using the geographically fragmented municipal bond underwriting market as a natural laboratory and a stacked difference-in-differences specification, I find that the underwriting spread rises by 5.3 basis points after within-market M&As from a sample mean of 103.0 basis points. The effects double for more significant M&As and triple in concentrated markets. While issuers become less likely to use credit ratings, bond insurance, or financial advisors, suggesting some efficiency gains to the M&As, these are insufficient to offset the rise in the underwriting spread. Effects hold when I examine M&As that are less likely to be driven by local economic dynamics and are absent in my placebo tests of cross-market M&As, commercial bank M&As, or withdrawn M&As. Using Census data, I confirm the detrimental effects of investment bank consolidation on local government financial health. My findings provide a novel perspective on bank antitrust regulations that traditionally focused on deposit-taking and lending activities.

Keywords: Municipal bond, investment bank, M&A, market power

JEL Classification: G24, G34, L22, H74

Suggested Citation

Li, Renping, When the Thin Bench Gets Thinner: Investment Bank Consolidation and Municipal Finance (January 8, 2024). Available at SSRN: https://ssrn.com/abstract=4687748 or http://dx.doi.org/10.2139/ssrn.4687748

Renping Li (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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