Distance Still Matters: Evidence from Municipal Bond Underwriting

Using a sample of municipal bond offerings, I find that "local"investment banks have substantial comparative and absolute advantagesover nonlocal counterparts-–locals charge lower fees andsell bonds at lower yields. Local investment banks’ strongestcomparative advantage is at underwriting bonds with higher creditrisk and bonds not rated by rating agencies. These findingssuggest that high-risk bonds and nonrated bonds are more difficultto evaluate and market, and that investment banks with a localpresence are better able to assess "soft" information and placedifficult bond issues.