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Dealer Behavior and the Trading of Newly Issued Corporate Bonds

38 Pages Posted: 19 Oct 2007 Last revised: 20 Mar 2008

Michael A. Goldstein

Babson College - Finance Division

Edith S. Hotchkiss

Boston College - Carroll School of Management

Date Written: October 2, 2007

Abstract

This study examines dealer behavior and trading activity for a sample of 3,181 newly issued corporate bonds, focusing on underpricing at issuance and subsequent price dispersion. Unlike the equity market, the measured underpricing is the result of both an ex-ante pricing decision made by the bonds' underwriters and significant price dispersion that occurs in the after-market for trading corporate bonds. For the full sample, underpricing averages 45 basis points (BP) for investment grade and 124 BP for high yield offerings. In the aftermarket, customers purchasing a bond on the same day from the same dealer frequently pay prices differing by over $2 (per $100 face amount). However, the introduction of transparency is associated with a reduction in underpricing and aftermarket price dispersion. Whether these gains are potentially passed on to issuing companies is less clear, as non-syndicate member dealers account for a significant proportion of after-market trading activity and price dispersion. Finally, regardless of transparency regime, there is no evidence that dealers in newly issued bonds accumulate significant inventory positions, even when issues subsequently trade below the offering price.

Keywords: corporate bonds, transparency, liquidity, TRACE, underpricing

JEL Classification: G14, G24, G32

Suggested Citation

Goldstein, Michael A. and Hotchkiss, Edith S., Dealer Behavior and the Trading of Newly Issued Corporate Bonds (October 2, 2007). AFA 2009 San Francisco Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1022356 or http://dx.doi.org/10.2139/ssrn.1022356

Michael A. Goldstein

Babson College - Finance Division ( email )

320 Tomasso Hall
Babson Park, MA 02457-0310
United States
781-239-4402 (Phone)
781-239-5004 (Fax)

HOME PAGE: http://faculty.babson.edu/goldstein/

Edith S. Hotchkiss (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Department of Finance Fulton Hall, Room 330
Chestnut Hill, MA 02467
United States
617-552-3240 (Phone)
617-552-0431 (Fax)

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