Competitive versus Negotiated Municipal Revenue Bond Issues: An Investigation of Underpricing

This paper compares reoffering yields and net interest cost of municipal revenue bonds sold by competitive bid with those sold by negotiation. Higher reoffering yields and net interest cost are observed on negotiated issues than on competitive issues receiving three or more bids, ceteris paribus. Yi...

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Bibliographic Details
Published inFinancial management Vol. 14; no. 1; pp. 26 - 32
Main Author Maese, Judy E.
Format Journal Article
LanguageEnglish
Published Tampa Financial Management Association 01.04.1985
Financial Management Association International
Blackwell Publishing Ltd
Subjects
Bids
Bond issues
Bond markets
Bond ratings
Borrowing
Competition
Credit ratings
Default
Differentials
Economic uncertainty
Financial instruments
Insurance underwriting
Interest costs
Interest rates
Investment Banking & New Securities Issues
Market analysis
Mathematical models
Municipal bonds
Prices
Primary markets
Regression analysis
Revenue bonds
Secondary markets
Underwriting
Variables
Yield
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Summary:This paper compares reoffering yields and net interest cost of municipal revenue bonds sold by competitive bid with those sold by negotiation. Higher reoffering yields and net interest cost are observed on negotiated issues than on competitive issues receiving three or more bids, ceteris paribus. Yield adjustments as the bonds move from the primary to the secondary market are then analyzed. Past researchers have attributed the yield differential between competitive and negotiated bonds to underpricing on negotiated bonds. If the yield differential is in fact due to underpricing, yields on negotiated issues should decrease relative to other issues in the secondary market. This study suggests that the primary market yield differential between competitive and negotiated revenue bonds is not due to underpricing, but reflects basic differences in the characteristics of the bonds not accounted for in the primary market analysis.
ISSN:0046-3892
1755-053X
DOI:10.2307/3665358