A Comprehensive Evaluation of the Comparative Cost of Negotiated and Competitive Methods of Municipal Bond Issuance
This study performs the first comprehensive analysis of the comparative interest costs of negotiated and competitive municipal bond issuance. In contrast to prior studies that relied upon data on a few hundred issues, the current study analyzes more than 250,000 new issues in the 1990-2006 time period.
The empirical findings presented in this study suggest that there is no general advantage of competitive over negotiated issuance processes. Rather, there appears to be a strong tendency for issuers to select the method of issuance that best suits the nature of the issue at hand such that efforts to mandate one type of issuance over the other will likely increase, rather than decrease, issuance costs.
Related: Edited version as it appeared in Municipal Finance Journal, Winter 2008. (PDF)
Excerpt
Executive Summary
This study performs the first comprehensive analysis of the comparative interest costs of negotiated and competitive municipal bond issuance. In contrast to prior studies that relied upon data on a few hundred issues, the current study analyzes more than 250,000 new issues in the 1990-2006 time period.
In addition, the study explicitly recognizes and treats two potential sources of bias. The first of these is so-called self selection bias that arises out of the fact that the method of issuance is not random but, rather, selected by the issuer with ultimate issuance cost in mind. The second source of bias is sample selection bias. This addresses the fact that not all issues are able to be included in a study due to non-random missing data processes.
The study also reports on the results of interviews of market participants including issuers, underwriters, broker dealers, and investment bankers. These interviews probed participants for their assessment of the pros and cons of negotiated and competitive issue processes. The interviews generally yielded the opinion that neither method of issue has advantage over the other in every case. The interview participants identified qualitativeaspects of each method of issue that are material but may not be captured easily in available data.
The analysis performed in this study compares true interest cost. Bias control is effected with both Heckman two stage modeling and with switching regression formulations. In addition, recent literature regarding the post marketing behavior of new issue prices is examined for the comparative effects in this regard of the method of issue