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The Quality of Advice: The Case of Financial Advisors

Using a large data sample of 33,469 new municipal issues covering the period from 1984 to 2002, we examine whether the quality of advice provided by a financial advisor affects new issue interest costs. We find that more reputable financial advisors are associated with statistically significant decreases in new issue yields. We argue that in the municipal debt market, price certification signals from financial advisors have minimal value to investors and therefore attribute these reputational effects primarily to the quality of the financial advice provided. We interpret our evidence as supportive of the quality of advice affecting yields rather than yields being affected by a signal about issuer quality. Another measure of the quality of advice is continuing relationships between the financial advisor and the issuer. We find that continuing relationships are also associated with reduced interest costs. The effect of advisor quality on yields is especially pronounced for more complex issues (negotiated and revenue bonds)

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	Allen, Arthur C Associate Professor of Accountancy Expertise: Financial Accounting Governmental and Nonprofit Accounting Accountancy CBA 388 P.O. Box 880488 University of Nebraska-Lincoln Lincoln, NE 68588-0488, USA Phone: (402) 472-3275 Fax: (402) 472-4100 aallen1@unl.edu	Allen, Arthur C	Accountancy
	Dudney, Donna Associate Professor of Finance Expertise: Financial Institutions Financial Markets & Investing Managerial Economics Finance CBA 243 P.O. Box 880490 University of Nebraska-Lincoln Lincoln, NE 68588-0490, USA Phone: (402) 472-5695 Fax: (402) 472-5140 ddudney@unl.edu	Dudney, Donna	Finance