Assessing Gains from Primary Market Allocations in Corporate Bonds

20 Pages Posted: 3 Jun 2021 Last revised: 11 Oct 2021

See all articles by Thomas Flanagan

Thomas Flanagan

University of Michigan, Stephen M. Ross School of Business

Simi Kedia

Rutgers Business School

Xing (Alex) Zhou

Board of Governors of the Federal Reserve System

Date Written: September 8, 2021

Abstract

Different market characteristics and investor behavior render the use of underpricing, widely used for equity IPOs, inadequate as a measure of gains from primary market allocations in corporate bonds. We propose a measure that reflects the illiquidity costs that investors save by avoiding acquiring the new bonds in secondary market and show that it can far exceed underpricing. We validate the measure by linking it to changes in secondary market liquidity arising from bond characteristics or induced by regulatory changes. We illustrate the value of the new measure by using it to document that “favoritism” in primary market allocations increases when secondary market liquidity is low.

Keywords: Corporate Bond Issuance, Underpricing, Primary Market Allocation, Secondary Market Liquidity

JEL Classification: G20, G22, G24, G28

Suggested Citation

Flanagan, Thomas and Kedia, Simi and Zhou, Xing (Alex), Assessing Gains from Primary Market Allocations in Corporate Bonds (September 8, 2021). Available at SSRN: https://ssrn.com/abstract=3859063 or http://dx.doi.org/10.2139/ssrn.3859063

Thomas Flanagan

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Simi Kedia

Rutgers Business School ( email )

117 Levin
94 Rockafellar Road
Piscataway, NJ
United States
8484454195 (Phone)

Xing (Alex) Zhou (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

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