State Government Use of the Same Underwriting Firm and the Impact on Borrowing Costs

Abstract

Repeated use of the same underwriter can have a significant impact on issuance costs. On the one hand, an issuer may accumulate relevant information from using the same underwriter for multiple issues, which can reduce information costs and lower borrowing costs. On the other hand, repeated use of the same underwriter can raise borrowing costs if organizational learning is limited and the issuer and underwriter together continue with previous errors in issuance strategy, leading to greater risk-taking and more inefficiency. Despite its importance, existing research on repeated use of the same underwriter in municipal debt issuance is limited because prior work ignores non-linear effects on municipal borrowing costs. This article draws from theories on transaction costs, relationships, and organizational learning to test hypotheses about the non-linear impacts of repeated use of the same underwriter on municipal borrowing costs. the article analyzes data on California state general obligation bonds using a menu of estimation techniques. A key finding is that after a critical threshold, borrowing costs tend to decrease as the state government repeatedly uses the same underwriter in debt issuance. the study enriches existing knowledge on the interdependence between issuers and underwriters and presents useful insights for state debt management programs.