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

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.