Inventory Capacity and Corporate Bond Offerings
64 Pages Posted: 11 Jan 2017 Last revised: 13 Jun 2019
Date Written: June 12, 2019
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: Suggested Citation