THE DISPERSION OF BIDS ON INDIVIDUAL NEW MUNICIPAL ISSUES

This paper examines the determinants of the dispersion of interest rates bid on competitively sold, new municipal issues. Theory suggests that the dispersion of prices (interest rates) on a new municipal issue depends on the expected costs and benefits of underwriter search on that issue. The greater the expected costs and the lower the expected benefits, the smaller will be underwriter search and the greater will be municipal interest rate dispersion. For empirical testing, the expected costs and benefits of underwriter search are measured by characteristics of the bond issue, the bond issuer, and the market conditions. The empirical tests suggest that the theory holds.