Overallocation and Secondary Market Outcomes in Corporate Bond Offerings

Abstract

Bond underwriters, lacking “Greenshoe options” and formal systems to track “flipping” activity, have fewer tools than equity underwriters to manage secondary market order flow uncertainty. We show that bond underwriters respond by selectively “overallocating” some issues to attain net short positions. Overallocations are economically substantive, facilitate the syndicate’s price stabilization efforts, and are largely offset in the days after issuance. Despite large syndicate purchases, these issues appreciate less in the aftermarket, i.e., are less underpriced. Overallocated issues are associated with institutional selling and higher retail participation, indicating that overallocation results in a redistribution of newly issued bonds toward retail investors.

Keywords: Underwriting Syndicate; Primary Allocation; Overallocation; Price Stabilization; Corporate Bonds; UnderPricing; Liquidity

JEL Classification: G14; G18; G24