Inventory-Constrained Underwriters and Corporate Bond Offerings

Abstract

We empirically study how inventory constraints of underwriters affect corporate bond offerings. Using transaction data at the underwriter-insurer level, we find that a more constrained underwriter is more likely to place a bond and increases the allocation in the primary market to an insurer with a stronger pre-existing relationship. The same underwriter is also more likely to buy back part of an allocation from the same insurer within 6 to 12 months after an offering. Overall, by parking inventory to relationship investors in the primary market, underwriters mitigate the effect of their inventory constraints on firms' cost of bond financing.

Keywords: U.S. corporate bond market, insurance firms, underwriter, primary market, underwriter-investor relationships, cost of bond financing

JEL Classification: G12, G32