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Abstract: 

Adding municipal bond insurance costs money and insurance competes with other forms of financial certification for the dollars of issuers. The problem facing issuers is to purchase just enough of it to signal the true condition of the issue. Kenneth Kriz notes that the “additional purchase of certification services will result in a [unnecessary] net cost to issuers and the citizens they serve.” Highlighting further the underlying citizen concerns at the center of research in this field, Kriz looks not only at bond insurance, but at the use of multiple credit ratings and ‘high reputation’ underwriters in the endeavor to minimize borrowing costs by signaling issue quality. He finds evidence (among other things) that the use of negotiated sales is a significant determinant of the decision to pursue multiple (three) bond ratings. This finding, which held constant the rating itself (you might expect issuers to buy more ratings when they are high), might suggest that issuers seek additional ways of capturing the effects of market scrutiny when issuing outside of the competitive process. Alternatively, this may be evidence that underwriters are able to use issuer resources to promote the quality of the bonds they intend to re-market.

Keywords: financial certification; multiple credit ratings; negotiated underwriting; bond insurance

Affiliations:  1: Humphrey Institute of Public Affairs, University of Minnesota.