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Abstract: 

Considerable theoretical literature exists concerning auctions and auction mechanisms. Empirical tests of theory, while growing in number, are still relatively limited. In this paper, we utilize a unique and large data set of municipal bonds sold in the primary market through electronic auctions and other methods to empirically explore and test some predictions from auction theory. Our results show that electronic auction mechanisms overall result in lower borrowing costs to issuers than conventional competitive or negotiated methods of sale. We also find that both open and closed auction mechanisms appear to be effective in reducing borrowing costs relative to conventional methods of sale and that electronic auctions are more likely to result in smaller underwriting firms winning the bids. Further analysis examining secondary market effects shows that underwriter gross spreads are lower for bonds sold through electronic auctions, particularly open electronic auctions, suggesting that the decrease in borrowing costs through electronic auctions is at least partly at the expense of winning underwriting firms.

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Affiliations:  1: Virginia Commonwealth University; 2: Virginia Commonwealth University.