Tricks of the Trade? Pre-Issuance Price Maneuvers by Underwriter-Dealers

We study the trading of dealers around new bond issues underwritten by affiliates using a complete matched record of U.S. bond market transactions, ownership structure, and bond issues from 2005 to 2015. Compared to dealers unaffiliated to the lead underwriter, affiliated dealers pay 30–60 basis points more for the issuer’s preexisting bonds — prior to, during, and after the issuance event. We interpret this phenomenon as price maneuvers aimed at lowering the reference yield for new issue investors. By examining dealer inventories and profits, we find no support for alternative explanations such as hedging, informed trading, or competitive advantage in market-making.

Keywords: Bond Underwriting, Dealer Market, Corporate Bonds, Price Support

JEL Classification: G12, G14, G23, G24

Suggested Citation: Suggested Citation

Auh, Jun Kyung and Auh, Jun Kyung and Kim, You Suk and Landoni, Mattia, Tricks of the Trade? Pre-Issuance Price Maneuvers by Underwriter-Dealers (July 9, 2019). Georgetown McDonough School of Business Research Paper No. 3132177, Finance Down Under 2019 Building on the Best from the Cellars of Finance, SMU Cox School of Business Research Paper No. 18-21, Available at SSRN: https://ssrn.com/abstract=3132177 or http://dx.doi.org/10.2139/ssrn.3132177