Structural Changes in Corporate Bond Underpricing
68 Pages Posted: 11 Jan 2017 Last revised: 30 Mar 2018
Date Written: March 26, 2018
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: Suggested Citation