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Estimating the Signaling Benefits of Debt Insurance: The Case of Municipal Bonds

Author

Listed:
  • Kidwell, David S.
  • Sorensen, Eric H.
  • Wachowicz, John M.

Abstract

This paper examines the demand for municipal bond insurance in the context of a competitive signaling equilibrium model. The study compares the pricing of new bond issues that are insured to similar issues that are not insured. The results indicate that issuers who purchase bond insurance, on average, are able to reduce their new issue borrowing cost more than enough to offset the cost of the insurance premium. Furthermore, the net benefit to the issuer increases as the underlying credit quality of the bond declines.

Suggested Citation

  • Kidwell, David S. & Sorensen, Eric H. & Wachowicz, John M., 1987. "Estimating the Signaling Benefits of Debt Insurance: The Case of Municipal Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(03), pages 299-313, September.
  • Handle: RePEc:cup:jfinqa:v:22:y:1987:i:03:p:299-313_01
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    Cited by:

    1. Kriz, Kenneth A., 2003. "Comparative costs of negotiated versus competitive bond sales: new evidence from state general obligation bonds," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(2), pages 191-211.
    2. Jayaraman Vijayakumar & Kenneth Daniels, 2006. "The Role and Impact of Financial Advisors in the Market for Municipal Bonds," Journal of Financial Services Research, Springer;Western Finance Association, vol. 30(1), pages 43-68, August.
    3. Brune, Chris & Liu, Pu, 2011. "The contagion effect of default risk insurer downgrades: The impact on insured municipal bonds," Journal of Economics and Business, Elsevier, vol. 63(5), pages 492-502, September.
    4. Kirstein, Roland & Gerhard, Hans, 2005. "The "Rainmaker's Dilemma": Bad Debt Loss Insurance in Settlement and Litigation," CSLE Discussion Paper Series 2005-02, Saarland University, CSLE - Center for the Study of Law and Economics.
    5. L Paul Hsueh & P. R. Chandy, 1989. "An Examination Of The Yield Spread Between Insured And Uninsured Debt," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 12(3), pages 235-244, September.
    6. Stéphanie Serve, 2002. "Le recours au financement désintermédié par une collectivité locale et l'évaluation de la prime de risque obligataire: le cas de la ville de Marseille," Revue Finance Contrôle Stratégie, revues.org, vol. 5(2), pages 107-142, June.
    7. Gore, Angela K & Sachs, Kevin & Trzcinka, Charles, 2004. "Financial Disclosure and Bond Insurance," Journal of Law and Economics, University of Chicago Press, vol. 47(1), pages 275-306, April.

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