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Do Investment Banks' Relationships with Investors Impact Pricing? The Case of Convertible Bond Issues


Brian J. Henderson


George Washington University - Department of Finance

Heather Tookes


Yale University - Yale School of Management; Yale University - International Center for Finance

April 15, 2010


Abstract:     
This paper examines the role of repeat interactions between placement agents (investment banks) and investors in the initial pricing of convertible bonds. Under the assumption that attracting repeat investors can reduce search frictions in primary issue markets, we test the hypothesis that banks' relationships with investors actually allow more favorable pricing for issuing firms (in contrast to the "favoritism'' hypothesis, under which banks use underpricing to reward favored clients). In the empirical analysis we also allow for a potentially important alternative channel through which search frictions might impact initial pricing: expected aftermarket liquidity. Using a sample of 601 Rule 144A issues for the years 1997-2007, we document robust negative relationships between at-issue discounts and both types of frictions. Our findings suggest that search frictions play a meaningful role in initial convertible bond pricing and, specifically, that intermediaries can add substantial value through repeated interactions with investors. Our results indicate that, with all other variables at their mean values, a deal with only 25% repeat investors will be priced at a 10.7% discount relative to fundamental value, while a deal with 75% repeat investors will be priced at a 7.1% discount. Given the mean deal size of $278 million, this translates to a potential savings of $10.2 million for the issuer.

Number of Pages in PDF File: 33

Keywords: Convertible Bonds, Investment Banks

JEL Classification: E50

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Date posted: February 2, 2010 ; Last revised: June 18, 2011

Suggested Citation

Henderson, Brian J. and Tookes, Heather, Do Investment Banks' Relationships with Investors Impact Pricing? The Case of Convertible Bond Issues (April 15, 2010). Available at SSRN: http://ssrn.com/abstract=1546671 or http://dx.doi.org/10.2139/ssrn.1546671

Contact Information

Brian Joseph Henderson
George Washington University - Department of Finance ( email )
Department of Finance, Funger Hall
2201 G Street, NW
Washington, DC 20052
United States
202-994-3669 (Phone)
Heather Tookes (Contact Author)
Yale University - Yale School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
Yale University - International Center for Finance ( email )
Box 208200
New Haven, CT 06520
United States
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