Do Municipal Bond Markups Reflect Accounting Quality?

42 Pages Posted: 1 May 2016

See all articles by Angela K. Gore

Angela K. Gore

George Washington University - School of Business

Brian J. Henderson

George Washington University - Department of Finance

Yuan Ji

The Hong Kong Polytechnic University

Date Written: April 11, 2016

Abstract

We examine whether accounting measures of information uncertainty – specifically, the presence of internal control problems – impact municipal bond markups. Markups are the differences between the prices paid by investors and those stipulated in the underwriting agreement, and are a source of compensation to bond dealers. Markups are controversial in part because they are not transparent and individual investors comprise a large portion of the investor base. Primary findings suggest that municipal bonds issued by entities with a material weakness in internal controls exhibit larger markups. Findings are magnified under circumstances of greater information asymmetry between issuers and investors, such as for revenue bond issuances, delayed release of financial information, and retail investor trades. Moreover, bonds issued by entities with material weaknesses remain in dealer inventory significantly longer before eventual sale to investors. Our evidence is consistent with markups reflecting compensation to underwriters for the additional risk and effort involved in placing bonds issued by entities with serious accounting problems.

Keywords: municipal bonds, markups, internal controls

JEL Classification: G38, H79, K22, M41, M45

Suggested Citation

Gore, Angela K. and Henderson, Brian Joseph and Ji, Yuan, Do Municipal Bond Markups Reflect Accounting Quality? (April 11, 2016). Available at SSRN: https://ssrn.com/abstract=2772605 or http://dx.doi.org/10.2139/ssrn.2772605

Angela K. Gore (Contact Author)

George Washington University - School of Business ( email )

2201 G St NW
Washington, DC 20052
United States
(202) 994-6195 (Phone)

Brian Joseph Henderson

George Washington University - Department of Finance ( email )

Department of Finance, Funger Hall
2201 G Street, NW
Washington, DC 20052
United States
202-994-3669 (Phone)

Yuan Ji

The Hong Kong Polytechnic University ( email )

Hung Hom
Kowloon, Hong Kong
Hong Kong

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