Institutional Allocations in the Primary Market for Corporate Bonds

76 Pages Posted: 31 May 2018 Last revised: 11 Aug 2019

See all articles by Stanislava (Stas) Nikolova

Stanislava (Stas) Nikolova

University of Nebraska - Lincoln

Liying Wang

University of Nebraska at Lincoln

J. (Julie) Wu

University of Nebraska - Lincoln

Date Written: August 9, 2019

Abstract

Using 2002–2014 insurer transactions, we provide the first empirical evidence on underwriters' allocation practices in the primary market for corporate bonds. Since bonds are often underpriced, allocations generate for investors an estimated $41 billion of first-day profits. These profits increase with proxies for investors’ information production during the bookbuilding process and, more strongly, with investors’ prior trading with underwriters. Information production has a larger impact when asymmetric information is higher, while prior trading has a larger impact when the issuer-underwriter agency problem is more severe. When there is more competition for allocations, prior trading further increases an insurer's first-day profits.

Keywords: corporate bonds, primary market allocations, underpricing, bookbuilding, trading relationship

JEL Classification: G14, G22, G24, G28, G30

Suggested Citation

Nikolova, Stanislava (Stas) and Wang, Liying and Wu, J. (Julie), Institutional Allocations in the Primary Market for Corporate Bonds (August 9, 2019). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3181983 or http://dx.doi.org/10.2139/ssrn.3181983

Stanislava (Stas) Nikolova (Contact Author)

University of Nebraska - Lincoln ( email )

Lincoln, NE 68588-0490
United States
402-472-6049 (Phone)

Liying Wang

University of Nebraska at Lincoln ( email )

Lincoln, NE 68588
United States

J. (Julie) Wu

University of Nebraska - Lincoln ( email )

Lincoln, NE 68588
United States

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