RFS Advance Access first published online on February 9, 2008
This version published online on February 11, 2008
Review of Financial Studies, doi:10.1093/rfs/hhn002
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Distance Still Matters: Evidence from Municipal Bond Underwriting
School of Management, The University of Texas at Dallas
Address correspondence to: Alexander W. Butler, Department of Finance and Managerial Economics, School of Management, SM 31, The University of Texas at Dallas, Richardson, TX 75083; e-mail: butler{at}utdallas.edu.
JEL: G24, G28, D80
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Abstract |
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Using a sample of municipal bond offerings, I find that "local" investment banks have substantial comparative and absolute advantages over nonlocal counterparts-–locals charge lower fees and sell bonds at lower yields. Local investment banks’ strongest comparative advantage is at underwriting bonds with higher credit risk and bonds not rated by rating agencies. These findings suggest that high-risk bonds and nonrated bonds are more difficult to evaluate and market, and that investment banks with a local presence are better able to assess "soft" information and place difficult bond issues.
I thank an anonymous referee for very detailed and helpful comments. Jim Angel, Utpal Bhattacharya, Long Chen, Josh Coval, Jeff Desimone, Gustavo Grullon, George Oldfield, David T. Robinson, Kim Rodgers, Chip Ryan, Mark Seasholes, and James Weston made helpful suggestions, and Kristy Freeman and Lindsay Altazin provided superb research assistance. Brenda Priebe provided editorial assistance. Seminar participants at Rice University, Texas State University, Baylor University, University of Kentucky, University of New Orleans, and University of Texas at San Antonio, and session participants at the 2003 Western Finance Association meetings, the 2004 Batten Young Scholars conference, and the 2006 International Conference on Management Sciences made valuable comments. I am especially grateful for substantial input from Lee Ann Butler and others at the Louisiana Department of the Treasury. Any errors are my own.