Do demand curves for corporate bonds slope down?

Publication Type

Journal Article

Publication Date

10-2024

Abstract

Bond initial public offering (IPO) underpricing is systematic, fluctuates noticeably over time, and is considerably larger during periods of high market uncertainty. Consistent with IPO theory, we find that underpricing is increasing in firm’s default probability. We also documented a novel result that very highly rated bonds (rated Aa and above) are also underpriced. In addition, we find that within each rating category, the underpricing is increasing in market volatility. Using transaction data, we document that corporate bond underpricing is robust to bid-ask bounces and not driven by small number of trades. Our results support IPO theories suggesting underwriters’ increasing difficulties in estimating asset value among firms with higher valuation uncertainty during periods of high market volatility.

Keywords

market volatility, bond pricing, bond IPO underpricing

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Publication

Journal of Fixed Income

Volume

34

Issue

2

First Page

30

Last Page

47

ISSN

1059-8596

Identifier

10.3905/jfi.2024.1.188

Publisher

Institutional Investor Inc

Additional URL

https://doi.org/10.3905/jfi.2024.1.188

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