The Cost Burden of Negotiated Sales Restrictions: A Natural Experiment Using Heterogeneous State Laws (joint with Richard C. Green, Burton Hollifield and Norman Schürhoff)

Abstract:

Should legislation ban book building for municipal bonds? What are the costs of requiring 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 unconstrained local governments. In a sample of 143,464 school bonds issued between 2004 and 2014 in the US, we find that the constraint has a negative cost. On average, offering yields are twelve percent lower for constrained issuers. This result suggests that unconstrained issuers do not choose between book building and public auctions based on expected borrowing costs. We also find that most unconstrained issuers prefer book building. The existing theories that explain the popularity of book building in IPOs cannot explain its popularity in the municipal bond market either. These results suggest that there are other relevant and undiscovered factors behind the popularity of book building.