The performance of corporate bond mutual funds and the allocation of underpriced new issues

Gjergji Cici, Scott Gibson, Nan Qin and Alex Zhang

No 22-11, CFR Working Papers from University of Cologne, Centre for Financial Research (CFR)

Abstract: Using a novel return-based method to detect allocations of corporate bond offerings, which are underpriced on average, we find that mutual funds most active in the primary market generate significant alpha and outperform those that are less active. Our evidence suggests that underwriters direct underpriced allocations repeatedly to fund families with which they have stronger underwriting relationships. Consistent with the concave performance-flow relationship that describes bond fund investors' behavior, families maximize profitability by strategically distributing allocations to member funds that underperformed their style benchmark over the last year at the expense of those that outperformed.

Date: 2022
New Economics Papers: this item is included in nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfrwps:2211

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