Tricks of the Trade? Pre-Issuance Price Maneuvers by Underwriter-Dealers
68 Pages Posted: 4 Jun 2018 Last revised: 11 Jul 2019
Date Written: July 9, 2019
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: Suggested Citation