Tricks of the Trade? Pre-Issuance Price Maneuvers by Underwriter-Dealers
68 Pages Posted: 7 Mar 2018 Last revised: 11 Jul 2019
Date Written: July 9, 2019
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