Contracting for Underwriters: Are All Underwriters Equal?

Abstract

Municipal bond sales require access to investors who ultimately buy the bonds. In most cases, this function is outsourced to an underwriter that acts as the financial intermediary between the bond issuer and the investor. We ask the question: how interchangeable are different underwriters? There is no organized market where municipal bonds are bought and sold. The interest rates on any particular issue can be affected by factors such as how much risk the underwriter is willing to take and underwriter reputation/certification. In this paper, we use data on Missouri local government bond sales from 2008–2011 to test whether the choice of a specific underwriter influences bond interest rates. We find that governments receive different pricing when selecting one firm versus another. This suggests that public managers should use contract management techniques to select underwriters and then evaluate the bond sale results.