Do Investment Banks' Relationships with Investors Impact Pricing? The Case of Convertible Bond Issues

Heather Tookes and Brian Henderson

Yale School of Management Working Papers from Yale School of Management

Abstract: This paper examines the role of search frictions in convertible bond pricing. Using a sample of 533 Rule 144-A issues for the years 1997-2007, we examine two channels through which search frictions might impact initial pricing: the ease of attracting initial investors and expected after-market liquidity. We document robust negative relationships between at-issue discounts and both types of frictions. Our findings suggest that search frictions play a meaningful role in pricing and that intermediaries can add value through repeated interactions with investors. This is in contrast to conflict of interest hypotheses, in which banks use underpricing to reward favored clients.

Date: 2010-01-01
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