Conflicts of Interest in Municipal Bond Advising and Underwriting*.

This article examines the impact of conflicts of interest among municipal financial advisors who also act as bond underwriters—referred to as "dual advisors"—on borrowing costs for U.S. state and local governments. Following the Dodd-Frank Act, the Municipal Securities Rulemaking Board (MSRB) updated Rule G-23 in 2011 to prohibit municipal advisors from simultaneously underwriting bonds they advise on. Using a difference-in-differences analysis of over 20,000 competitive municipal bond auctions, the study finds that banning dual advisors from underwriting reduces borrowing costs by approximately 11.4 basis points (5.3%), primarily by increasing auction participation, standardization, third-party credit certifications, and secondary market liquidity. The effects are most pronounced for opaque issuers such as school districts with low auction participation, where conflicts of interest previously exacerbated adverse selection and deterred competition. The findings suggest that limiting advisor conflicts of interest can improve municipal borrowing outcomes by reducing asymmetric information without harming market competition.