Conditional Conservatism and Underpricing in US Corporate Bond Market

30 Pages Posted: 15 Jan 2012 Last revised: 25 Jan 2017

See all articles by Mingzhi Liu

Mingzhi Liu

University of Manitoba - Asper School of Business

Michel Magnan

Concordia University - Department of Accountancy

Date Written: February 1, 2014

Abstract

Building upon recent research suggesting that debt markets rather than equity markets shape financial reporting, this study examines the relationship between conditional conservatism (used as a proxy for information risk) and the underpricing of newly issued corporate bonds. There are two contrasting arguments for bond underpricing: the information argument predicts that bond issuers with less information risk will experience less underpricing, while the signaling argument indicates that bond issuers with less information risk will underprice more to distinguish them from issuers with more information risk. Empirical results indicate that the signaling argument seems to better capture the dynamics of the public debt markets, with conditional conservatism being associated with greater underpricing of newly issued corporate bonds.

Keywords: Conditional Conservatism; Bond Underpricing; Information and Signaling Argument

JEL Classification: G10; M41

Suggested Citation

Liu, Mingzhi and Magnan, Michel, Conditional Conservatism and Underpricing in US Corporate Bond Market (February 1, 2014). Applied Financial Economics, Vol. 24, No. 20, 2014. Available at SSRN: https://ssrn.com/abstract=1985586 or http://dx.doi.org/10.2139/ssrn.1985586

Mingzhi Liu (Contact Author)

University of Manitoba - Asper School of Business ( email )

460-181 Freedman Crescent
Winnipeg, Manitoba R3T 5V5
Canada
204-474-6847 (Phone)

HOME PAGE: http://umanitoba.ca/faculties/management/faculty_staff/academic_professors/mingzhi-liu.html

Michel Magnan

Concordia University - Department of Accountancy ( email )

Montreal, Quebec H3G 1M8
Canada

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