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

Published online by Cambridge University Press:  06 April 2009

W. W. Higgins  and
B. J. Moore
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Extract

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].

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 15 , Issue 1 , March 1980 , pp. 85 - 97
Copyright
Copyright © School of Business Administration, University of Washington 1980

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References

REFERENCES

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