The Impact of Electronic Auctions and Auction Types on the Market for Municipal Bonds

Municipal Finance Journal, Vol. 28, No. 2, pp. 25-47, Summer 2007

31 Pages Posted: 25 May 2007 Last revised: 6 Feb 2008

See all articles by Kenneth N. Daniels

Kenneth N. Daniels

Daniels Foundation for Impact Investments and Development

Jayaraman Vijayakumar

Virginia Commonwealth University (VCU) - Department of Accounting

Abstract

Considerable theoretical literature exists concerning auctions and auction mechanisms. Empirical tests of theory while growing are still relatively limited. In this paper, we utilize a unique and large data set of municipal bonds sold in the primary market through electronic auctions and other methods to empirically explore and test some predictions from auction theory. Our results show that electronic auction mechanisms overall result in lower borrowing costs to issuers than conventional competitive or negotiated methods of sale. We also find that both open and closed auction mechanisms appear to be equally effective in reducing borrowing costs relative to conventional methods of sale and that electronic auctions are more likely to result in smaller underwriting firms winning the bids. Further analysis examining secondary market effects shows that underwriter gross spreads are lower for bonds sold through electronic auctions suggesting that the decrease in borrowing costs through electronic auctions is at least partially at the expense of winning underwriting firms.

Keywords: Electronic bidding, Municipal Bonds, Auctions

JEL Classification: C70, G12, H70

Suggested Citation

Daniels, Kenneth N. and Vijayakumar, Jayaraman, The Impact of Electronic Auctions and Auction Types on the Market for Municipal Bonds. Municipal Finance Journal, Vol. 28, No. 2, pp. 25-47, Summer 2007, Available at SSRN: https://ssrn.com/abstract=989004

Kenneth N. Daniels

Daniels Foundation for Impact Investments and Development ( email )

New Jersey, NJ 07018
United States

Jayaraman Vijayakumar (Contact Author)

Virginia Commonwealth University (VCU) - Department of Accounting ( email )

Richmond, VA 23284
United States

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