Person: Cestau, Dario
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Dario
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Cestau
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IE University
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IE Business School
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Finance
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Publication Not all General Obligation Bonds Are Created Equal(2021-07-04) Cestau, Dario; https://ror.org/02jjdwm75We document a comprehensive new classification of the legal structures backing municipal bonds and the effects that different legal features have on bond yields. It is a well-documented fact that investors rely on credit ratings to determine the credit risk of municipal bonds. However, rating agencies do not fully factor in the legal structures backing the bonds because measuring and testing the effects of said legal structures is inherently onerous. Since the price of risk is unusually high in this market, these flaws have important effects on yields.Publication Specialization investments and market power in the underwriting market for municipal bonds(2020) Cestau, Dario; https://ror.org/02jjdwm75I find that municipal bond underwriters tend to specialize either in competitive sales or in negotiated sales. In a sample of 69,347 school district deals, on average, the market shares of competitive deals of the three main underwriters of negotiated deals in the state are 85% smaller than their shares of negotiated deals. Similarly, the top three competitive underwriters in the state have market shares of negotiated deals 94% smaller than their shares of competitive deals. I also find that competitive and negotiated sales require different types of specialization investments. The former requires investments in dealer networks, while the latter requires building relationships with investors and issuers. Local underwriters have a cost advantage in the specialization investments required for negotiated sales, and often dominate this market. However, this cost advantage disappears quickly crossing state borders. On the other hand, underwriters who invest in dealer networks can amortize their investment in multiple states. Compared to negotiated underwriters, I find that prime competitive underwriters in one state are more likely to become dominant competitive underwriters in a second state. Therefore, banks with pre-established networks have a cost advantage for competitive sales, and these markets are often dominated by national banks headquartered in New York. These cost dynamics also explain the higher industry concentration observed in negotiated sales markets.Publication Competition and Market Concentration in the Municipal Bond Market(SSRN, 2019-07-11) Cestau, Dario; https://ror.org/02jjdwm75Lack of competition among the underwriters of municipal bonds increases the borrowing costs of local municipalities. I find that the proportion of municipal bonds sold in competitive sales in the state has an economically significant effect on several measures of competitiveness. Competitive sales increase the number of active underwriters in the state and substantially decrease the concentration in the market for underwriting services for municipal bonds. I also find that state restrictions on the negotiated sale of municipal bonds can materially decrease market concentration. Market concentration has increased considerably over time, but only negotiated deals have contributed to greater concentration.Publication Should State Governments Prohibit the Negotiated Sales of Municipal Bonds?(SSRN, 2020-08-06) Cestau, Dario; Green, Richard; Hollifield, Burton; Schuerhoff, Norman; https://ror.org/02jjdwm75Should 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.Publication Municipal Bond Markets(Anual Reviews, 2019-12) Cestau, Dario; Hollifield, Burton; Li, Dan; Schürhoff, Norman; https://ror.org/02jjdwm75The effective functioning of the municipal bond market is crucial for the provision of public services, as it is the largest capital market for state and municipal issuers. Prior research has documented tax, credit, liquidity, and segmentation effects in municipal bonds. Recent regulatory initiatives to improve transparency have made granular trade data available to researchers, rendering the municipal bond market a natural laboratory for the study of financial intermediation, asset pricing in decentralized markets, and local public finance. Trade-by-trade studies have found large trading costs, contemporaneous price dispersion, and other deviations from the law of one price. More research is required to understand optimal market design and the impact of post-crisis regulation, sustainability, and financial technologyPublication College Achievement and Attainment Gaps: Evidence from West Point Cadets(National bureau of economic research, 2020-05) Cestau, Dario; Epple, Dennis; Romano, Richard; Sieg, Holger; Wojtaszek, Carl; https://ror.org/02jjdwm75Assessing the effectiveness of education by race and gender is as difficult as it is important. We investigate this question utilizing data for eleven cohorts at West Point, a distinguished military academy and highly ranked liberal arts college. Employing matching using entry scores on three comprehensive measures, we obtain exceptional matches of score distributions for black and matched white students. We find black students have lower graduating achievement scores than matched white students, but comparable rates of graduation, retention in the Army after graduation, and early promotion. Hispanic-white comparisons reveal no differences. Female-male comparisons reveal women have lower attainment and retention rates.