David S. Kidwell

SEC Rule 415: The Ultimate Competitive Bid

Controversy surrounds the Securities and Exchange Commissions (SEC) Rule 415 that went into effect in March 1982 and remained an experiment until it was permanenty adopted for large firms in November 1983. Rule 415allows a company to register all the securities it plans to issue over the next two years and then to sell someor all of the securities whenever it chooses. This procedure is known as a shelf registration. The purposes of Rule 415 are to simplify the registration of new corporate securities and to allow more flexibility in the way issues are underwritten.

The Impact of Relative Security Supplies: A Test with Data from a Regional Tax-Exempt Bond Market

WHETHER CHANGES IN RELATIVE SECURITY SUPPLIES have an impact on relative interest rates is a matter of much debate. Some contend that efficient markets prevent more than a momentary impact, and others (e.g. [4] ) argue that severe market segmentation exists virtually everywhere. The answer to this query, it seems to us, depends greatly on the markets being considered. If the question is phrased in terms of the impact of changes in long-term federal debt on the relationship between yields on new issue U.S. government and high-quality corporate debt of equal maturity, then we would expect the impact to be minimal.1 These instruments would seem to be close substitutes in too many portfolios for a significant impact to exist more than momentarily. On the other hand, where debt instruments are taxed quite differently or where government regulations prevent shifts of substantial investors between instruments, a case can likely be made for significant market segmentation. One such case involves the market for tax-exempt debt of state and local governments. Moreover, within this market geographic and regional factors

Estimating the Signaling Benefits of Debt Insurance: The Case of Municipal Bonds

This paper examines the demand for municipal bond insurance in the context of a competitive signaling equilibrium model. The study compares the pricing of new bond issues that are insured to similar issues that are not insured. The results indicate that issuers who purchase bond insurance, on average, are able to reduce their new issue borrowing cost more than enough to offset the cost of the insurance premium. Furthermore, the net benefit to the issuer increases as the underlying credit quality of the bond declines.

Market Segmentation and the Term Structure of Municipal Yields

AN ISSUE OF CONSIDERABLE CONTROVERSY in recent years is whether segmentation exists in the municipal bond market. The presence of market segmentation suggests that securities can be subdivided into distinct groups according to some characteristic and there exists a lack of substitution between these groups on the part of borrowers and/or investors [ 1, 4, 8] . Hendershott and Kidwell [4], for example, found evidence that market segmentation affected yields between regionally and nationally marketed municipal bond issues. Others contend that the municipal bond market is relatively efficient and no permanent segmentation effects can exist [2, 9]. Most recently, Campbell [2] examined possible segmentation resulting from the large acquisitions of municipal securities by commercial banks and found that bank demand for municipal securities had no significant influence on the yield spreads between municipal bonds which differed in default risk, term to maturity, and tax treatment. This is consistent with the argument that the combination of progressive personal income tax rates and fixed corporate income tax rates induces corporations to issue an amount of debt such that the marginal investor in taxable and tax-exempt securities pays taxes at the full corporate rate [9]. If segmentation does not exist, two peculiar features of the term structure of municipal yields cannot be fully explained. For one, municipal yields have almost always increased monotonically with maturity. This is true both for market averages of similarly rated municipal securities and for reoffering yields on individual serial

Systematic Variation in Yield Spreads for Tax-Exempt General Obligation Bonds

In recent years much research has centered upon whether yield differentials between bonds which differ in default risk vary systematically over the business cycle. Theory suggests that during a cyclical upswing the yield differential (or risk premium) narrows, while during a downswing the differential widens. The cyclical behavior of yield spreads is well documented in the corporate bond market [4, 8, 12, 16]. This effect has only recently been given attention in the tax-exempt bond market [1, 11]. In addition, the municipal bond market may be segmented. If tax-exempt borrowers and investors are unable to substitute between tax-exempt securities of varying default risk, changes in the relative supply of and demand for these classes of securities could produce systematic fluctuations in tax-exempt yield differentials. These effects could be produced by regulatory statutes which require that banks purchase high-grade securities and the fixed nature of bond ratings.

Shelf Registration: Competition and Market Flexibility

SHELF registration of new securities, known as Rule 415, began as an experiment by the Securities and Exchange Commission (SEC) in March 1982 and was permanently adopted in November 1983.1 With this rule companies file a single registration statement for all the securities they plan to issue over the next two years and then sell some or all of the securities whenever they choose. Because the SEC traditionally has prohibited delayed offerings, this is a major change in policy. The reason for this prohibition is the SECs requirement that timely information be available in the offering prospectus. If there is a substantial delay between registration and the sale of the securities, the SEC believes the registration statement will become dated. Investors therefore would base their

Issue size and term-structure segmentation effects on regional yield differentials in the municipal bond market

Abstract This study extends the debate regarding segmentation influences in the market for municipal securities. In particular, it provides empirical evidence that relative security supplies, differential pledging requirements, and differential state personal income taxes produce systematic differences in municipal borrowing costs across states. These influences vary by issue size and term to maturity.

The Impact of the New York City Fiscal Crisis on the Interest Cost of New Issue Municipal Bonds

The default of a major corporation or municipality generates debate over the impact these failures have on the borrowing cost of other issuers. Theory suggests that in efficient markets individual failures by themselves should not increase the level of interest rates in a market unless the default provides unanticipated information about other issuers. The default of New York City in the summer of 1975 was believed by many to have provided information that increased the perceived risk of investors and consequently increased new issue borrowing costs in the municipal bond market. Empirical research by Forbes and Peterson [2] and Gramlich [3] supports this contention, reporting that borrowers paid as much as 119 basis points more because of the New York City crisis. A study by Hoffland [6] suggests that the impact of the default was not just temporary, but was felt long after 1975. Though less scientific, others note that during 1975 municipal borrowing costs rose to record high levels with most issues carrying their interest cost during the summer of 1975.

Bond Banks: A State Assistance Program That Helps Reduce New Issue Borrowing Costs

During the last decade both the annual amounts that state and local governments borrowed and the interest rates paid for this debt have repeatedly reached record high levels. Further, throughout 1981, interest rates remained near record high levels with the Bond Buyer 20-year index over 10 percent. Thus, increasing debt burdens coupled with high interest rates are exacerbating the well-publicized financial problems of many municipalities. It is not surprising, therefore, that state and local governments are seeking ways to minimize borrowing costs on their new long-term bond issues. One state assistance program that holds promise in reducing borrowing costs is the formation of a state bond bank. The purpose of this paper is to investigate empirically whether bond banks lower municipal borrowing costs, and if so, to what types of issuer do the benefits accrue.1