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

68 Pages Posted: 4 Jun 2018 Last revised: 11 Jul 2019

See all articles by Jun Kyung Auh

Jun Kyung Auh

Georgetown University - Department of Finance

You Suk Kim

Board of Governors of the Federal Reserve System

Mattia Landoni

Southern Methodist University (SMU) - Finance Department

Multiple version iconThere are 2 versions of this paper

Date Written: July 9, 2019

Abstract

We study the trading of dealers around new bond issues underwritten by their affiliates using a complete matched record of U.S. bond market transactions, bond issue deals, and underwriter ownership structure from 2005 to 2015. Compared to dealers unaffiliated with the lead underwriter, affiliated dealers pay up to 54 basis points more for the issuer's preexisting bonds—prior to, during, and after the issuance event. We interpret this phenomenon as cross-security price support and, prior to the event, 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

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. 3190476; SMU Cox School of Business Research Paper No. 18-25. Available at SSRN: https://ssrn.com/abstract=3190476 or http://dx.doi.org/10.2139/ssrn.3190476

Jun Kyung Auh (Contact Author)

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States

You Suk Kim

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Mattia Landoni

Southern Methodist University (SMU) - Finance Department ( email )

United States

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