Specialization investments and market power in the underwriting market for municipal bonds

Cestau, Dario

Publication:
Specialization investments and market power in the underwriting market for municipal bonds

dc.contributor.author	Cestau, Dario
dc.contributor.ror	https://ror.org/02jjdwm75
dc.date.accessioned	2025-04-24T14:03:08Z
dc.date.available	2025-04-24T14:03:08Z
dc.date.issued	2020
dc.description.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.
dc.description.peerreviewed	yes
dc.description.status	Published
dc.format	application/pdf
dc.identifier.citation	Cestau, D. (2020). Specialization investments and market power in the underwriting market for municipal bonds. Working paper.
dc.identifier.uri	https://hdl.handle.net/20.500.14417/3759
dc.language.iso	en
dc.relation.department	Finance
dc.relation.entity	IE University
dc.relation.school	IE Business School
dc.rights	Attribution-NonCommercial-NoDerivatives 4.0 International
dc.rights.accessRights	info:eu-repo/semantics/openAccess
dc.rights.uri	https://creativecommons.org/licenses/by-nc-nd/4.0/deed.en
dc.subject.keyword	Market power
dc.subject.keyword	Concentration
dc.subject.keyword	Herfindahl Index
dc.subject.keyword	Book building
dc.subject.keyword	Auctions
dc.subject.keyword	Municipal bonds.
dc.title	Specialization investments and market power in the underwriting market for municipal bonds
dc.type	info:eu-repo/semantics/workingPaper
dc.version.type	info:eu-repo/semantics/publishedVersion
dspace.entity.type	Publication
relation.isAuthorOfPublication	9305e847-1b1f-459c-a881-7cfaca868a1f
relation.isAuthorOfPublication.latestForDiscovery	9305e847-1b1f-459c-a881-7cfaca868a1f