Is There a Racial Bias in Underwriter Fees? Evidence from U.S. County Government Bond Issuance

Abstract

This paper investigates whether racial disparities in underwriter fees exist. Using tax-exempt bonds issued by U.S. County governments, we find that underwriting spread increases with increasing county's black-to-white population ratio. The result holds after using instrumental-variable 2-stage least squares regression to address potential endogeneity concerns. Further analysis shows that the bond issuer’s financial constraints drive our result. In other words, lower levels of wealth and higher levels of financial distress of the issuing municipality explain the racial bias in underwriting spread. We also document that the observed racial bias is mitigated when there is a higher local market competition among underwriters.