IDEAS home Printed from https://ideas.repec.org/a/eee/moneco/v60y2013i5p593-608.html
   My bibliography  Save this article

Tax-subsidized underpricing: The market for Build America Bonds

Author

Listed:
  • Cestau, Dario
  • Green, Richard C.
  • Schürhoff, Norman

Abstract

Build America Bonds (BABs) were issued by municipalities for 20 months as a part of the 2009 fiscal package. Unlike traditional tax-exempt municipals, BABs are taxable to the holder, but the Treasury rebates 35% of the coupon to the issuer. The stated purpose was to provide municipalities access to a more liquid market including foreign, tax-exempt, and tax-deferred investors. We find BABs do not exhibit greater liquidity than traditional municipals. BABs are more underpriced initially, particularly for interdealer trades. BABs also show a substitution from underwriter fees toward more underpricing, suggesting that the underpricing is a strategic response to the tax subsidy.

Suggested Citation

  • Cestau, Dario & Green, Richard C. & Schürhoff, Norman, 2013. "Tax-subsidized underpricing: The market for Build America Bonds," Journal of Monetary Economics, Elsevier, vol. 60(5), pages 593-608.
    • Handle: RePEc:eee:moneco:v:60:y:2013:i:5:p:593-608
    DOI: 10.1016/j.jmoneco.2013.04.010
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304393213000597
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jmoneco.2013.04.010?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hsuan‐Chi Chen & Jay R. Ritter, 2000. "The Seven Percent Solution," Journal of Finance, American Finance Association, vol. 55(3), pages 1105-1131, June.
    2. Andrew Ang & Vineer Bhansali & Yuhang Xing, 2010. "Build America Bonds," NBER Working Papers 16008, National Bureau of Economic Research, Inc.
    3. Richard C. Green, 2007. "Presidential Address: Issuers, Underwriter Syndicates, and Aftermarket Transparency," Journal of Finance, American Finance Association, vol. 62(4), pages 1529-1550, August.
    4. Paul Schultz, 2001. "Corporate Bond Trading Costs: A Peek Behind the Curtain," Journal of Finance, American Finance Association, vol. 56(2), pages 677-698, April.
    5. Green, Richard C, 1993. "A Simple Model of the Taxable and Tax-Exempt Yield Curves," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 233-264.
    6. Green, Richard C. & Hollifield, Burton & Schurhoff, Norman, 2007. "Dealer intermediation and price behavior in the aftermarket for new bond issues," Journal of Financial Economics, Elsevier, vol. 86(3), pages 643-682, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dougal, Casey & Gao, Pengjie & Mayew, William J. & Parsons, Christopher A., 2019. "What’s in a (school) name? Racial discrimination in higher education bond markets," Journal of Financial Economics, Elsevier, vol. 134(3), pages 570-590.
    2. Gao Liu & Dwight V. Denison, 2014. "Indirect and Direct Subsidies for the Cost of Government Capital: Comparing Tax-Exempt Bonds and Build America Bonds," National Tax Journal, National Tax Association;National Tax Journal, vol. 67(3), pages 569-594, September.
    3. Darío Cestau, 2018. "The political affiliation effect on state credit risk," Public Choice, Springer, vol. 175(1), pages 135-154, April.
    4. Dario Cestau & Burton Hollifield & Dan Li & Norman Schürhoff, 2019. "Municipal Bond Markets," Annual Review of Financial Economics, Annual Reviews, vol. 11(1), pages 65-84, December.
    5. Baridhi Malakar, 2024. "Fiduciary Duty in the Municipal Bonds Market," Papers 2406.15197, arXiv.org.
    6. Wilson, Christian & Caldecott, Ben, 2023. "Investigating the role of passive funds in carbon-intensive capital markets: Evidence from U.S. bonds," Ecological Economics, Elsevier, vol. 209(C).
    7. Richter, Sylvia & Heyde, Frank & Horsch, Andreas & Wünsche, Andreas, 2021. "Determinants of project bond prices – Insights into infrastructure and energy capital markets," Energy Economics, Elsevier, vol. 97(C).
    8. Baridhi Malakar, 2024. "Essays on Responsible and Sustainable Finance," Papers 2406.12995, arXiv.org.
    9. Jess N. Cornaggia & Kimberly J. Cornaggia & Ryan D. Israelsen, 2020. "Where the Heart Is: Information Production and the Home Bias," Management Science, INFORMS, vol. 66(12), pages 5532-5557, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ronen, Tavy & Zhou, Xing, 2013. "Trade and information in the corporate bond market," Journal of Financial Markets, Elsevier, vol. 16(1), pages 61-103.
    2. Di Maggio, Marco & Kermani, Amir & Song, Zhaogang, 2017. "The value of trading relations in turbulent times," Journal of Financial Economics, Elsevier, vol. 124(2), pages 266-284.
    3. John M. Griffin & Nicholas Hirschey & Samuel Kruger, 2023. "Do Municipal Bond Dealers Give Their Customers “Fair and Reasonable” Pricing?," Journal of Finance, American Finance Association, vol. 78(2), pages 887-934, April.
    4. Gabor Pinter & Chaojun Wang & Junyuan Zou, 2024. "Size Discount and Size Penalty: Trading Costs in Bond Markets," The Review of Financial Studies, Society for Financial Studies, vol. 37(7), pages 2156-2190.
    5. O’ Hara, Maureen & Wang, Yihui & (Alex) Zhou, Xing, 2018. "The execution quality of corporate bonds," Journal of Financial Economics, Elsevier, vol. 130(2), pages 308-326.
    6. Ana Babus & Péter Kondor, 2018. "Trading and Information Diffusion in Over‐the‐Counter Markets," Econometrica, Econometric Society, vol. 86(5), pages 1727-1769, September.
    7. Harald Hau & Peter Hoffmann & Sam Langfield & Yannick Timmer, 2021. "Discriminatory Pricing of Over-the-Counter Derivatives," Management Science, INFORMS, vol. 67(11), pages 6660-6677, November.
    8. Zhiguo He & Konstantin Milbradt, 2014. "Endogenous Liquidity and Defaultable Bonds," Econometrica, Econometric Society, vol. 82(4), pages 1443-1508, July.
    9. Darko B. Vukovic & Carlos J. Rincon & Moinak Maiti, 2021. "Price distortions and municipal bonds premiums: evidence from Switzerland," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-21, December.
    10. Jankowitsch, Rainer & Nashikkar, Amrut & Subrahmanyam, Marti G., 2011. "Price dispersion in OTC markets: A new measure of liquidity," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 343-357, February.
    11. Ricardo Lagos & Guillaume Rocheteau, 2009. "Liquidity in Asset Markets With Search Frictions," Econometrica, Econometric Society, vol. 77(2), pages 403-426, March.
    12. Li, Yubin & Zhao, Chen & Zhong, Zhaodong, 2019. "Price discrimination against retail Investors: Evidence from mini options," Journal of Banking & Finance, Elsevier, vol. 106(C), pages 50-64.
    13. Liu, Hong & Wang, Yajun, 2016. "Market making with asymmetric information and inventory risk," Journal of Economic Theory, Elsevier, vol. 163(C), pages 73-109.
    14. Friewald, Nils & Jankowitsch, Rainer & Subrahmanyam, Marti G., 2014. "To disclose or not to disclose: Transparency and liquidity in the structured product market," CFS Working Paper Series 461, Center for Financial Studies (CFS).
    15. Marco Di Maggio & Amir Kermani & Zhaogang Song, 2016. "The Value of Trading Relationships in Turbulent Times," NBER Working Papers 22332, National Bureau of Economic Research, Inc.
    16. Cuny, Christine, 2018. "When knowledge is power: Evidence from the municipal bond market," Journal of Accounting and Economics, Elsevier, vol. 65(1), pages 109-128.
    17. Zhang, Shengxing, 2018. "Liquidity misallocation in an over-the-counter market," Journal of Economic Theory, Elsevier, vol. 174(C), pages 16-56.
    18. Richter, Sylvia & Heyde, Frank & Horsch, Andreas & Wünsche, Andreas, 2021. "Determinants of project bond prices – Insights into infrastructure and energy capital markets," Energy Economics, Elsevier, vol. 97(C).
    19. Daniel Garrett & Andrey Ordin & James W Roberts & Juan Carlos Suárez Serrato, 2023. "Tax Advantages and Imperfect Competition in Auctions for Municipal Bonds," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(2), pages 815-851.
    20. Schultz, Paul, 2012. "The market for new issues of municipal bonds: The roles of transparency and limited access to retail investors," Journal of Financial Economics, Elsevier, vol. 106(3), pages 492-512.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:moneco:v:60:y:2013:i:5:p:593-608. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505566 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.