Does Financial Advisor Quality Improve Liquidity and Issuer Benefits in Segmented Markets? – Evidence from the Municipal Bond Market

• In Event: Bond Markets and Participants

Abstract

Using a unique and large sample (over 563,000 bonds) of competitively bid municipal revenue bonds with financial advisors issued during the period 1998-2012, we examine the role and influence of financial advisor quality in the municipal bond market. Our results suggest that high quality financial advisors provide a credible signal to market participants about issue and issuer quality. This signal translates to greater number of bids for issues that use high quality financial advisors, resulting in improved liquidity and lower borrowing costs for these issues. Our results also show that the beneficial effects obtained by using higher quality financial advisors are more prevalent for more complex issues such as refunding issues, and for issues that are not insured. The benefits are also observed for issues of all sizes except those that fall between the 25th and 50thth percentiles in terms of issue size. Our results also suggest that the passage of the Dodd Frank act which calls for mandatory registration for all financial advisors and increased scrutiny has only increased the benefits to issuers from using higher quality financial advisors.

Authors

• Kenneth Daniels, VCU

• Jack W Dorminey, West Virginia University

• Brent Smith, Virginia Commonwealth University

• Jayaraman Vijayakumar, Virginia Commonwealth University