Conflicts of Interest in Municipal Bond Advising and Underwriting
Year: 2024
Type: article
Abstract: When can financial advisor conflicts of interest generate worse outcomes for clients? A regulation following from Dodd-Frank prohibits municipal advisors from simultaneously acting as bond underwriters. Using a difference-in-differences approach and 20,051 bond auctions, I test whether limited advisor privileges affect financial advice and borrower outcomes. Financing costs of bonds with potential dual advisor-underwriters fall by 11.4 basis points after the advisor is no longer allowed to underwrite. The decline follows from increases in standardization, third-party certification, and auction participation, all of which are consistent with limiting the adverse selection that arises from advisors withholding information from the market. (JEL D44, D53, G12, G14, G28, H74)
Source: Review of Financial Studies
DOI: 10.1093/rfs/hhae037
Author: Daniel G Garrett
Institution: University of Pennsylvania
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W4401639311