Inventory Capacity and Corporate Bond Offerings

64 Pages Posted: 11 Jan 2017 Last revised: 13 Jun 2019

See all articles by Florian Nagler

Florian Nagler

Bocconi University

Giorgio Ottonello

Vienna Graduate School of Finance (VGSF)

Date Written: June 12, 2019

Abstract

We study how underwriters' inventory capacity effects the initial allocation, pricing and trading of corporate bond offerings. We theoretically show that a decrease in aggregate inventory capacity incentivizes those underwriters having access to relationship investors to excessively allocate bonds to them. In exchange, relationship investors obtain increased underpricing and resell their excessive holdings in the secondary market. Using an instrumental variable we empirically show that, through the relationship channel, the post-crisis drop in inventory capacity leads to a simultaneous increase in underpricing and customer sales. Our results suggest that a lowering of inventory imposes a negative externality on bond issuers.

Keywords: U.S. corporate bond market, underwriter, inventory, initial allocation, underpricing, trading of newly issued bonds, underwriter-investor relationships

JEL Classification: G12, G32

Suggested Citation

Nagler, Florian and Ottonello, Giorgio, Inventory Capacity and Corporate Bond Offerings (June 12, 2019). 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/

Giorgio Ottonello

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

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