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Structural Changes in Corporate Bond Underpricing

Florian Nagler and Giorgio Ottonello

No 1748, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

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.

Keywords: US corporate bond market; underpricing; underwriter-investor relations; post- crisis regulation; reaching for yield (search for similar items in EconPapers)
JEL-codes: G12 G32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn
Date: 2017
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