Breaking the Bond: The Effect of Banker Turnover on Municipal Bonds
Abstract
This paper explores whether relationships with banks or individual bankers de- livergreatervaluetomunicipalborrowers. Akeyidentificationstrategyexploits the quasi-exogenous shock from the 2021 Texas underwriter ban, which barred five of the largest banks from underwriting municipal bonds in the state and triggered widespread banker departures. Using novel data on banker moves, I show that affected municipalities follow their banker at twice the rate of unaf- fected peers. Instrumenting the follow decision in an IV–DiD framework, I find that following the banker reduces yield spreads by 36 basis points, fully offset- tingtheban’s4basis-pointspreadincrease. Theseimprovementsariseviathree channels: an informational channel, where unrated issuers lacking public credit signals experience an extra 16 basis-point decline; a network channel, where institutional investors allocate $1 million more per quarter to the banker’s new bank; and a banker-quality channel, where following an MBA-educated banker generates an additional 22 basis-point spread reduction. Overall, relationship- specific human capital significantly shapes municipal underwriting outcomes.