Should State Governments Prohibit the Negotiated Sales of Municipal Bonds?

Abstract

Should legislation ban the negotiated sales of municipal bonds? What are the costs of forcing public auctions? We compare the offering yields of local governments that are forced by state law to use public auctions to the offering yields of local governments that can choose between auctions and negotiated sales. Using a sample of 369,482 school bonds issued between 2004 and 2014, we find that a restriction on negotiated sales has a negative cost instead of positive. The prohibition benefits issuers on average. The offering yields of constrained issuers are 17 basis points lower than the offering yields of unconstrained issuers. The effect is equivalent to a rating upgrade from non-rated to AA-. Nevertheless, most issuers prefer to use negotiated sales even if they do not maximize bond proceeds.