Journal of Monetary Economics2013-09-05 2:57 AM

Tax-subsidized underpricing: The market for Build America Bonds

Highlights • Build America Bonds (BABs) were created through 2009 fiscal stimulus package. • Instead of tax-exempt bonds, municipalities received rebates on taxable coupons. • BABs do not have improved liquidity. • BABs are more underpriced when issued. • The tax rebate creates incentives to underprice BABs. Abstract Build America Bonds (BABs) were issued by municipalities for 20 months as a part of the 2009 fiscal package. Unlike traditional tax-exempt municipals, BABs are taxable to the holder, but the Treasury rebates 35% of the coupon to the issuer. The stated purpose was to provide municipalities access to a more liquid market including foreign, tax-exempt, and tax-deferred investors. We find BABs do not exhibit greater liquidity than traditional municipals. BABs are more underpriced initially, particularly for interdealer trades. BABs also show a substitution from underwriter fees toward more underpricing, suggesting that the underpricing is a strategic response to the tax subsidy.

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Journal of Monetary Economics

The Journal of Monetary Economics is a peer-reviewed academic journal covering research on macroeconomics and monetary economics. It is published by Elsevier and was established in October 1973 by Karl Brunner and Charles I. Plosser.

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