Pay Now, Play Later: Political Contributions and Underwriting Relationships in the Muni Market

Abstract

We investigate political contributions made by municipal underwriters under the regulation of Rule G- 37, which requires detailed disclosure and prohibits contributing underwriters from conducting municipal securities business for two years if the contribution exceeds $250. We find that underwriters can circumvent the rule by making multi-small donations (multiple contributions under the de minimis limit of $250) and such strategy leads to a significant increase in their negotiated market shares. Large donations (contributions above the de minimis limit of $250) are also associated with higher future market shares, but with a two-year delay. Further analyses show that these effects are primarily driven by contributions to elected officials. Large donations are primarily targeted to states with fast growing negotiated bond issuance but where the underwriter has not had much business success. By contrast, underwriters tend to make substantial donations to political parties in states where they have already established strong underwriting relations. We also provide evidence that underwriters making large donations on average charge higher underwriting fees. Our findings suggest that underwriters adopt different strategies to build connections with municipal issuers and political contributions still play an influential role even after the implementation of Rule G-37.