Publication: Specialization investments and market power in the underwriting market for municipal bonds
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Date
2020
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Abstract
I 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.
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Attribution-NonCommercial-NoDerivatives 4.0 International
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IE Business School
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Cestau, D. (2020). Specialization investments and market power in the underwriting market for municipal bonds. Working paper.