SELF-DEALING IN SECURITIES ISSUANCE Evidence from U.S. State Bonds

Self-dealing in securities issuance can be characterized by an issuing manager who gains at the expense of the other existing stakeholders in the issue. The current system of public securities issuance for U.S. states potentially allows for conflict of interest through campaign contributions that benefit issuing officials. This paper shows that selecting a contributing underwriter through negotiation results in underpricing compared to a non-contributing underwriter. It also shows that an increase in the amount of campaign contributions by an underwriter results in an increase in the likelihood of selection. This result is mainly driven by lower-ranked underwriters. The pricing result is robust to endogeneity of the selection of a contributing underwriter. First-stage results of instrumental variable regression methods indicate that a large margin of victory for the political official is associated with a larger proportion of potentially conflicted deals. In addition, out of all the issues done through negotiation by underwriters who contributed, the issues that went to market in the year immediately after an election are the most underpriced.  I would like to thank the members of my dissertation committee: Nejat Seyhun, Jim Hines, Serdar Dinc, Sreedhar Bharath, and Sugato Bhattacharyya for guidance and support. In addition, I am grateful to Tyler Shumway, Vikram Nanda, Amy Dittmar, and seminar participants at the University of Michigan for helpful suggestions.