Price Pressure and Corporate Bond Underpricing: Evidence from Newly-issued and Tack-on Offerings

Abstract

Tack-on bond issues are additional offerings, with the same terms and CUSIP, of an existing bond
series. We provide new evidence of systematic underpricing for tack-on corporate bonds. These
bonds are offered at prices significantly below their immediate post-offer secondary market prices.
By exploiting the availability of pre-tack-on offer prices, we find statistically significant negative
bond price reaction on the offer date. Our regression and event study results show that underpricing is partially attributable to price pressure effects. We also test existing underpricing theories and find evidence supporting the valuation uncertainty and information asymmetry hypothesis.

Keywords: Bond Underpricing, Tack-on Offerings, Price Pressures

JEL Classification: G24,G32