Kauppakorkeakoulu | Rahoituksen laitos | Rahoitus | 2015
Tutkielman numero: 14086
Information and liquidity: The dynamics of new corporate bond underpricing
|Otsikko:||Information and liquidity: The dynamics of new corporate bond underpricing|
|Vuosi:||2015 Kieli: eng|
|Asiasanat:||rahoitus; financing; rahoitusinstrumentit; financial instruments; hinnoittelu; pricing; rahoitusmarkkinat; financial markets; kriisi; crisis; euro; euro|
|Avainsanat:||corporate bonds; initial public offerings; bond IPOs; pricing; financial crisis; euro|
OBJECTIVES OF THE STUDY:
The purpose of this study is to investigate the information and liquidity effects of corporate bond underpricing in the euro bond market. Most of the existing literature on new security issue underpricing focuses on equities; however, recent studies have found similar underpricing for corporate bond IPOs. This thesis adds to the existing research by investigating the relatively young euro corporate bond market, while also providing evidence on the effects of the financial crisis of 2007-2008 on corporate bond underpricing.
DATA AND METHODOLOGY:
The sample consists of 1813 euro-denominated bonds from 360 individual non-financial corporations. 153 bond issues are identified as bond IPOs, or the inaugural bond issued by a company, while the rest are defined as seasoned bond offerings (SBOs). The sample ranges from 1999 to 2013, and includes issuers from 25 countries from the European Union and European Free Trade Association. Underpricing is indicated by initial returns, adjusted with the return of similar bonds in Barclays Capital bond indexes. A positive initial return indicates underpricing. Initial returns for IPOs and SBOs are first investigated and compared in panels divided according to several categories to test for information and liquidity effects. Next, multivariate OLS regressions are performed with several models to control for other factors and assess the relative importance of the determinants of underpricing. Matching samples of IPOs and SBOs are then constructed to check the robustness of the results.
Significant underpricing is found in both the IPO (71 basis points) and SBO (35 basis points) samples. Information problem theories receive significant support from the results, while no liquidity effects are found. The financial crisis of leads to an increase in underpricing of 61 basis points on average and 78 basis points for IPOs. The financial also increases the significance of many information related factors, while reducing the additional underpricing of high yield bonds relative to investment grade bonds.
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