Tricks of the Trade? Pre-Issuance Price Maneuvers by Underwriter-Dealers
57 Pages Posted: 4 Jun 2018 Last revised: 10 Feb 2019
Date Written: October 11, 2018
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 to the lead underwriter, affiliated dealers pay 16-40 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: Suggested Citation