Underpricing in the Corporate Bond Market

Cai, Kelly Nianyun; Helwege, Jean; Warga, Arthur

doi:10.2139/ssrn.890323

Cited by 27 publications

(10 citation statements)

References 23 publications

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“…Given the bid-ask spreads prevalent in secondary markets, this would suggest that the median loan is underpriced by about 30-40 bps relative to the bid price in the secondary market. This level of underpricing is comparable to the 47bps reported by Cai, Helwege, and Warga (2007) for high-yield bonds. It is much lower than the underpricing for stocks (Jenkinson and Ljungqvist (2001) report an average of around 19 percent over four decades in the US).…”

Section: Introductionsupporting

confidence: 76%

“…With a typical bid-ask spread of about 75 bps, the profit would be about 37.5 bps. This number is lower than the 19% underpricing found for stocks (Jenkinson and Ljungqvist, 2001), is similar to the 47 bps underpricing found for speculative-grade bonds and higher than the zero underpricing found for investment-grade bonds (Cai, Helwege, and Warga, 2007).…”

Section: Description Of Adjustments (Flexes)supporting

confidence: 48%

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Pipeline Risk in Leveraged Loan Syndication

Bruche

Malherbe

Meisenzahl

2017

FEDS

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Leveraged term loans are typically arranged by banks but distributed to institutional investors. Using novel data, we find that to elicit investors' willingness to pay, arrangers expose themselves to pipeline risk : They have to retain larger shares when investors are willing to pay less than expected. We argue that the retention of such problematic loans creates a debt overhang problem. Consistent with this, we find that the materialization of pipeline risk for an arranger reduces its subsequent arranging and lending activity. Aggregate time series exhibit a similar pattern, which suggests that the informational friction we identify could amplify the credit cycle.JEL classifications: G23, G24, G30

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Section: Introductionsupporting

confidence: 76%

Section: Description Of Adjustments (Flexes)supporting

confidence: 48%

Pipeline Risk in Leveraged Loan Syndication

Bruche

Malherbe

Meisenzahl

2017

FEDS

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“…As shown in Figure 2, the trading of bonds required by passive investors is substantial, which adds to their costs. IPO underpricing also occurs with corporate bonds, with an average magnitude of 0.47% for high yield and 0.02% for investment grade (Cai, Helwege, and Warga 2007).…”

Section: Sharpening the Arithmetic Of Active Managementmentioning

confidence: 99%

Sharpening the Arithmetic of Active Management

Pedersen

2018

Financial Analysts Journal

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“…Possible explanations are reviewed in Ritter and Welch (2002). Cai et al (2007) document underpricing for corporate bonds. Several papers have tried to explain underpricing as the product of signaling (examples are Allen and Faulhaber 1989, Grinblatt and Hwang 1989, and Welch 1989.…”

mentioning

confidence: 99%

How do Financial Intermediaries Create Value in Security Issues?*

2013

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Abstract. We study incentive provision in a model of securities issuance with an informed issuer and uninformed investors. We show that the presence of an informed intermediary may increase surplus even if we allow for collusion between the intermediary and the issuer. Collusion is neutralized by introducing a misalignment between the interests of the issuer and those of the intermediary. To achieve this, the intermediary commits to hold some of the securities. The intermediary then underprices the remaining securities and extracts any investor surplus through a "participation fee". We provide an explanation for the diffusion of book-building and quid pro quo practices in IPOs.

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Underpricing in the Corporate Bond Market

Cited by 27 publications

References 23 publications

Pipeline Risk in Leveraged Loan Syndication

Pipeline Risk in Leveraged Loan Syndication

Sharpening the Arithmetic of Active Management

How do Financial Intermediaries Create Value in Security Issues?*

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