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Structural Changes in Corporate Bond Underpricing

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  • Florian Nagler
  • Giorgio Ottonello

Abstract

We show that in the aftermath of the financial crisis underwriters systematically place the most underpriced bonds to closely affiliated investors. We argue that in securing future intermediation in newly issued bonds, underwriters collude with affiliated investors who are rewarded through increased underpricing. We employ a novel identification strategy based on institutional investors' past holdings of bonds issued by underwriters to isolate the strength of underwriter-investor relations. Our channel fully explains the increase in average underpricing in the post-crisis relative to the pre-crisis period. Furthermore, we underpin the mechanism by examining the trading activity of newly issued bonds. Our results are informative about potential implications of post-crisis regulation.

Suggested Citation

  • Florian Nagler & Giorgio Ottonello, 2017. "Structural Changes in Corporate Bond Underpricing," BAFFI CAREFIN Working Papers 1748, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    • Handle: RePEc:baf:cbafwp:cbafwp1748
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    Cited by:

    1. Dick-Nielsen, Jens & Nielsen, Mads Stenbo & von Rüden, Stine Louise, 2021. "The value of bond underwriter relationships," Journal of Corporate Finance, Elsevier, vol. 68(C).
    2. Rischen, Tobias & Theissen, Erik, 2018. "Underpricing in the euro area corporate bond market: New evidence from post-crisis regulation and quantitative easing," CFR Working Papers 18-03, University of Cologne, Centre for Financial Research (CFR).

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    More about this item

    Keywords

    US corporate bond market; underpricing; underwriter-investor relations; post- crisis regulation; reaching for yield;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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