Markup or Markdown: National Underwriters' Exit and the Changing Landscape of Municipal Finance

49 Pages Posted: 25 Jun 2024

See all articles by John Hund

John Hund

University of Georgia

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School; Frank Hawkins Kenan Institute of Private Enterprise

Christos Makridis

Stanford University; Institute for the Future (IFF), Department of Digital Innovation, School of Business, University of Nicosia; Arizona State University (ASU); Department of Veterans Affairs (VA)

Giang Nguyen

Pennsylvania State University - Smeal College of Business

Date Written: June 16, 2024

Abstract

Both the increased transparency and the institutionalization of the municipal bond market have led to dramatic declines in the profits of underwriters, especially so for those whose underwriting activity is national in scope. Using comprehensive data on all trades, all bonds, and all underwriting spreads available between 2005 and 2023, we show that underwriters facing increasingly informed investors in the primary market are unable to capture high markups from investors but are also unable to raise costs to issuers. Using a structural model to examine trading, we document underwriters are half as likely over the time span of our sample to encounter an uninformed retail investor when selling an issue, and the markups they can charge these dwindling investors have fallen by a third. Increased transparency has not benefited issuers but has led to a decline in profitability for the largest municipal underwriters, several of whom have announced their departure from the market.

Keywords: Public Finance, Municipal Bonds, Underwriters, Markup, Transparency, ESG

JEL Classification: G24, G14, G18, H74

Suggested Citation

Hund, John and Lundblad, Christian T. and Makridis, Christos and Nguyen, Giang, Markup or Markdown: National Underwriters' Exit and the Changing Landscape of Municipal Finance (June 16, 2024). Available at SSRN: https://ssrn.com/abstract=4867270 or http://dx.doi.org/10.2139/ssrn.4867270

John Hund

University of Georgia ( email )

Athens, GA 30602
United States

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-8441 (Phone)

Frank Hawkins Kenan Institute of Private Enterprise ( email )

Campus Box 3440, The Kenan Center
Chapel Hill, NC 27599-344
United States

Christos Makridis (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

Institute for the Future (IFF), Department of Digital Innovation, School of Business, University of Nicosia ( email )

Nicosia, 2417
Cyprus

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

Department of Veterans Affairs (VA) ( email )

810 Vermont Avenue NW
Washington, DC 20420
United States

Giang Nguyen

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802
United States

HOME PAGE: http://directory.smeal.psu.edu/gxn13

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