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An empirical analysis of market and institutional mechanisms for alleviating information asymmetry in the municipal bond market

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Abstract

This article examines how various market and institutional mechanisms resolve information asymmetry problems in the municipal bond market in the U.S. Information asymmetry exists in this market since a significant percentage of the investors are individuals on one side and many of the issuers are infrequent and relatively small ones on the other side. Using a two-stage switching regression model, we find that these mechanisms, including self-certification, method of sale, underwriter certification, and underlying credit ratings for insured municipal bonds, all help resolve information asymmetry problems and thus reduce borrowing cost for the issuers. (JEL G14)

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Authors and Affiliations

  1. Eller College of Business and Public Administration, University of Arizona, Arizona, USA

    Jun Peng & Peter F. Brucato (President, Cricket Asset Management)

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  1. Jun Peng
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  2. Peter F. Brucato
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Correspondence to Jun Peng.

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Peng, J., Brucato, P.F. An empirical analysis of market and institutional mechanisms for alleviating information asymmetry in the municipal bond market. J Econ Finan 28, 226–238 (2004). https://doi.org/10.1007/BF02761613

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