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Market Structure versus Information Costs as Determinants of Underwriters' Spreads on Municipal Bonds

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  • Higgins, W. W.
  • Moore, B. J.

Abstract

The market for underwriting services provides a valuable opportunity to test two competing hypotheses in monopsony theory. When applied to the area of investment banking, the theory implies that spread behavior ought to be influenced not only by the average costs of providing underwriting services, but also by the extent of vigorous competition. In competitive markets the prices of products and services tend to reflect minimum average costs in the long run. When competition declines, spreads can be expected to widen. A number of empirical studies have established that spread behavior is in fact dependent on the extent of bidding competition [5, 8, 9, 2]. “The intensity of competition in underwriting new issues of tax exempts has the expected effect on underwriters' spreads, that is, the difference between buying and selling prices; spreads decrease as the degree of competition increases” [2, p. 707].

Suggested Citation

  • Higgins, W. W. & Moore, B. J., 1980. "Market Structure versus Information Costs as Determinants of Underwriters' Spreads on Municipal Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(1), pages 85-97, March.
    • Handle: RePEc:cup:jfinqa:v:15:y:1980:i:01:p:85-97_00
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    Cited by:

    1. Sebastián Nieto-Parra, 2009. "Who Saw Sovereign Debt Crises Coming?," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2009), pages 125-169, August.
    2. Herrero, Alicia Garcia & Santos, Enestor Dos, 2009. "Comment," LSE Research Online Documents on Economics 123275, London School of Economics and Political Science, LSE Library.
    3. Earl R. Wilson & Jenice P. Stewart, 1990. "Municipal financial reporting and competition among underwriters for new issues of general obligation bonds," Contemporary Accounting Research, John Wiley & Sons, vol. 6(2), pages 573-592, March.

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