Do Risk Premia Explain Dealer Markups in Municipal Bond Offerings?

Abstract

We show that dealer markups in the primary market for municipal bonds include compensation for the price risk that dealers bear in the underwriting process. We also show that the markup per unit of risk is higher for negotiated than for competitive bond offerings and that improvements in market transparency have affected the relationship between risk and dealer markups. For bond offerings in the state of Texas, where gross underwriting fees are publicly available, we find that primary market dealer markups are higher on bond offerings where the explicit part of the underwriting fees are lower. JEL: G12