Fiduciary Duty in the Municipal Bonds Market

Paper: arXiv 2406.15197

Authors: Baridhi Malakar

Abstract

I examine whether the imposition of fiduciary duty on municipal advisors affects bond yields and advising fees. Using a difference-in-differences analysis, I show that bond yields reduce by $\sim$9% after the imposition of the SEC Municipal Advisor Rule due to lower underwriting spreads. Larger municipalities are more likely to recruit advisors after the rule is effective and experience a greater reduction in yields. However, smaller issuers do not experience a reduction in offering yields after the SEC Rule. Instead, their borrowing cost increases if their primary advisor exits the market. Using novel hand-collected data, I find that the average advising fees paid by issuers does not increase after the regulation. Overall, my results suggest that while fiduciary duty may mitigate the principal-agent problem between some issuers and advisors, there is heterogeneity among issuers.

Complexity vs Empirical Score

• Math Complexity: 2.5/10
• Empirical Rigor: 8.5/10
• Quadrant: Street Traders — practical and empirical, lighter on theory

Why this score: The paper relies on standard empirical corporate finance econometrics (difference-in-differences with extensive high-dimensional fixed effects) rather than complex theoretical math. Its strength lies in high empirical rigor, leveraging a well-designed quasi-natural experiment and novel hand-collected data on advising fees to address significant policy questions regarding market regulation.

Research Flowchart

  flowchart TD
    A[Research Question: Effect of Fiduciary Duty SEC Rule on Municipal Bond Yields & Fees] --> B[Data Inputs: Hand-collected Advising Fees, Bond Yields & Underwriting Spreads]
    B --> C[Methodology: Difference-in-Differences Empirical Analysis]
    C --> D[Computational Yield & Cost Analysis]
    D --> E[Finding 1: Overall Bond Yields Fall ~9% via Lower Underwriting Spreads]
    D --> F[Finding 2: Heterogeneity — Large Issuers Gain Yield Reductions; Small Issuers Face Higher Costs if Advisors Exit]
    D --> G[Finding 3: Average Advising Fees Do Not Increase Post-Regulation]

Cited References (201)

1. Environmental Externalities and Cost of Capital (2014) — link
2. Shareholder Bargaining Power, Debt Overhang, and Investment (2018) — link
3. Secondary trading costs in the municipal bond market (2006)
4. Identifying agglomeration spillovers: Evidence from winners and losers of large plant openings (2010)
5. Municipal borrowing costs and state policies for distressed municipalities (2019)
6. Bond insurance: What is special about munis? (2004)
7. Captured development: Industry influence and state economic development subsidies in the Great Recession era (2017)
8. Equilibrium in competitive insurance markets: An essay on the economics of imperfect information (1978)

0 of 201 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.