Structural Changes in Corporate Bond Underpricing

68 Pages Posted: 11 Jan 2017 Last revised: 30 Mar 2018

See all articles by Florian Nagler

Florian Nagler

Bocconi University; IGIER - Innocenzo Gasparini Institute for Economic Research; BAFFI - Center on International Markets, Money, and Regulation

Giorgio Ottonello

Vienna Graduate School of Finance (VGSF)

Date Written: March 26, 2018

Abstract

We show that in the aftermath of the financial crisis underpricing of corporate bonds increases because underwriters systematically place bonds to relationship investors. We argue that the post-crisis decrease in inventory-carrying capacities incentivizes underwriters to secure future intermediation by outsourcing bonds to related investors who require, in exchange, increased underpricing. We isolate the strength of underwriter-investor relations by employing a novel empirical identification strategy based on institutional investors' past holdings of underwriters' own bonds. The relationship channel fully captures the increase in underpricing from the pre-crisis to the post-crisis period. Furthermore, post-crisis, we show that relationship investors are net sellers of newly issued bonds.

Keywords: US corporate bond market, underpricing, initial allocation, underwriter-investor relations, post-crisis environment

JEL Classification: G12, G32

Suggested Citation

Nagler, Florian and Ottonello, Giorgio, Structural Changes in Corporate Bond Underpricing (March 26, 2018). BAFFI CAREFIN Centre Research Paper No. 2017-48. Available at SSRN: https://ssrn.com/abstract=2896758 or http://dx.doi.org/10.2139/ssrn.2896758

Florian Nagler (Contact Author)

Bocconi University ( email )

Via Roentgen 1
Milan, MI 20136
Italy

HOME PAGE: http://sites.google.com/site/floriannagler/

IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Milan, MI 20136
Italy

BAFFI - Center on International Markets, Money, and Regulation ( email )

Milan, MI 20136
Italy

Giorgio Ottonello

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

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