Overallocation and Secondary Market Outcomes in Corporate Bond Offerings

66 Pages Posted: 13 Aug 2020 Last revised: 2 May 2022

See all articles by Hendrik Bessembinder

Hendrik Bessembinder

W.P. Carey School of Business

Stacey E. Jacobsen

Southern Methodist University (SMU) - Finance Department

William F. Maxwell

Southern Methodist University (SMU) - Finance Department

Kumar Venkataraman

Southern Methodist University (SMU) - Finance Department

Date Written: April 29, 2022

Abstract

Bond underwriters, lacking “Greenshoe options” and formal systems to track “flipping” activity, have fewer tools than equity underwriters to manage secondary market order flow uncertainty. We show that bond underwriters respond by selectively “overallocating” some issues to attain net short positions. Overallocations are economically substantive, facilitate the syndicate’s price stabilization efforts, and are largely offset in the days after issuance. Despite large syndicate purchases, these issues appreciate less in the aftermarket, i.e., are less underpriced. Overallocated issues are associated with institutional selling and higher retail participation, indicating that overallocation results in a redistribution of newly issued bonds toward retail investors.

Keywords: Underwriting Syndicate; Primary Allocation; Overallocation; Price Stabilization; Corporate Bonds; UnderPricing; Liquidity

JEL Classification: G14; G18; G24

Suggested Citation

Bessembinder, Hendrik (Hank) and Jacobsen, Stacey E. and Maxwell, William F. and Venkataraman, Kumar, Overallocation and Secondary Market Outcomes in Corporate Bond Offerings (April 29, 2022). SMU Cox School of Business Research Paper No. 20-04, Available at SSRN: https://ssrn.com/abstract=3611056 or http://dx.doi.org/10.2139/ssrn.3611056

Hendrik (Hank) Bessembinder

W.P. Carey School of Business ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

HOME PAGE: http://isearch.asu.edu/profile/2717225

Stacey E. Jacobsen

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

United States

William F. Maxwell

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

United States

Kumar Venkataraman (Contact Author)

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

United States
214-768-7005 (Phone)
214-768-4099 (Fax)

HOME PAGE: http://people.smu.edu/kumar/

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