Do municipalities pay more to issue unrated bonds?

In this paper, we investigate why municipalities do not obtain ratings for their bond issues and whether this raises their issuance costs. Approximately 34 % of local municipal bonds were issued without ratings during 1998–2017. We show that issuers are less likely to obtain ratings for smaller, negotiated offerings, and bonds issued by municipalities with low personal income. Using a doubly robust inverse probability weighted regression adjustment, we estimate that rated bonds have 37–59 basis points lower offering yields than the unrated bonds. We find the choice of issuers to forgo ratings despite the substantial potential savings is associated with the choice of underwriter. Prior to the reform that prohibited underwriters from also working as advisors to the issuer, use of a dual underwriter was associated with not obtaining a rating.