April 2012
Dealer Behavior and the Trading of Newly Issued Corporate Bonds
Michael A. Goldstein
Babson College
223 Tomasso Hall
Babson Park, MA 02457
goldstein@babson.edu
781-239-4402
Edith S. Hotchkiss
Boston College
Fulton Hall, Room 340
Chestnut Hill, MA 02467
hotchkis@bc.edu
(617) 552-3240
Abstract
This paper provides some of the first evidence on the behavior of dealers trading in newly issued
corporate bonds, based on a sample of 4,122 bonds issued from July 2002 to May 2008. We find
that there is economically large underpricing for corporate bond issues, but that the measured
underpricing reflects both the underwriters’ ex-ante pricing decision as well as price dispersion
in after-market trading. Based on institutional sized trades (over 100 bonds), underpricing
averages 45 basis points (BP) for investment grade and 124 BP for high yield offerings. Large
institutions are net sellers of bonds in the initial days of trading, while smaller sized retail
customers purchase bonds from non-syndicate member dealers at widely varying prices; small
customers purchasing a bond on the same day from the same dealer frequently pay prices
differing by over $2 (per $100 face amount). Finally, there is no evidence that dealers in newly
issued bonds accumulate significant inventory positions, even when issues subsequently trade
below the offering price.
_________________________________________________________________
The authors are indebted to David Pedersen for extensive research assistance.
I. Introduction.
The frequency with which firms issue public debt and the dollar magnitude of these
issues is large relative to the heavily studied markets for public equity offerings. Despite the
importance of this market for firm’s cost of capital, there has been relatively little study of price
and dealer behavior in this market. In this study, we examine a sample of 4,122 corporate bonds
issued between July 2002 and May 2008, and show how price behavior in this market is related
to characteristics of the dealers marketing and trading in these issues.1
The availability of transactions price information to dealers and investors in U.S. bond
markets has undergone significant changes in recent years.
While corporate bonds have
historically traded in an opaque dealer market without centralized reporting of trades, the
information environment for trading these bonds began to change on July 1, 2002, when the
National Association of Securities Dealers (NASD) initiated a program of increased post-trade
transparency, known as the Trade Reporting and Compliance Engine (TRACE) system. The
availability to us of transactions level data since the start of TRACE permits us to study behavior
in this market at the dealer level.
We first examine the overall liquidity of newly issued bonds.
Interestingly, large
institutions are net sellers of bonds in the first three days of trading, and subsequently become
net buyers as trading volume declines over the subsequent days and months. Smaller retail
investors, however, largely buy bonds in the first days of trading, and often do so at widely
varying prices. Since the non-publicly disseminated TRACE data provided to us uniquely allows
us to examine trades identified by dealer, unlike previous studies, we are able to measure
dispersion as the difference in price paid across customer buys from the same dealer for the same
1
In this sense, our work parallels that of Ellis, Michaely and O’Hara (2000), who provide the first transactions level
analysis of dealer behavior for equity IPOs on Nasdaq.
1
bond on the same day.2 Small customers often purchase the same bonds from the same dealer at
prices differing by over $2 (per $100 face amount), though economically significant dispersion is
also observed for institutional sized trades. The sales of bonds to smaller retail customers are
frequently attributable to non-syndicate member dealers, who have purchased the bonds from
institutional customers or in the interdealer market. We also find that measured price dispersion
declines over time following the introduction of TRACE, though it increases again with the
March 2007 onset of the financial crisis.3
We then show that the corporate bonds in our sample exhibit significant underpricing,
even when we account for the impact of price dispersion on measured underpricing.
Underpricing is statistically and economically significant, averaging 45 basis points (BP) for
investment grade and 124 BP for high yield offerings.4
As a percentage of the offering amount,
underpricing for bonds is smaller than has been widely documented for equity markets.
However, given the large dollar size of many bond offerings and their relative frequency, the
dollar amount of “money left on the table” is significant, and large relative to underwriter fees
and other costs of the offering. We also provide evidence of a reduction in underpricing and
price dispersion over time subsequent to the July 2002 introduction of TRACE. Whether these
gains are potentially passed on to issuing companies, however, is less clear, as non-syndicate
2
The transactions data used for this study include an anonymous dealer code, enabling us to group trades by dealer.
Green, Hollifield and Schurhoff (2007b) show that in the municipal bond market, price dispersion is largely due to
small trades which occur at a wide range of prices almost simultaneously. Similarly, Goldstein, Hotchkiss and Sirri
(2007) show the presence of a substantial number of outliers in price within the TRACE data, suggesting that
customers trading near in time often pay (or receive) widely differing prices. In his AFA Presidential address,
Green (2007) models the dealer behavior leading to observed price dispersion when there is a lack of transparency in
secondary markets. An important implication of his model is that dealers’ ability to discriminate between informed
and uninformed customers is reduced with the introduction of transparency.
4
Cai, Helwege & Warga (2006) examine trades by insurance companies and find no significant underpricing for
investment grade bonds and underpricing averaging 47 BP for high yield issues. Datta, Iskandar-Datta and Patel
(1997) examine first time bond offerings of 50 issuers and find underpricing of 1.86% for high yield issues and
overpricing of 2.88% for investment grade issues. Kozhanov, Ogden and Vaghefi (2011) argue that corporate bonds
are overpriced at issuance.
3
2
member dealers account for a significant proportion of the trading activity and price dispersion in
the after-market for newly issued bonds.
Theoretically, the impact of transparency on underwriter’s ex-ante pricing decision is not
clear. If agency problems between the underwriter and issuer are important, underpricing may
increase to offset reduced profits from trading in the transparent after-market.5 Unlike equities,
underwriters may also retain significant inventory risk in corporate bonds, particularly when an
offering proves difficult to place.
Increased underpricing would reduce this risk to the
underwriter. In contrast, if underpricing is compensation for the risk that the security will be
illiquid after issuance as in Ellul and Pagano (2006), underpricing may decrease if transparency
is associated with improved after-market liquidity. Further, under transparency, investors can
observe transactions prices for similar, previously issued bonds then trading in the aftermarket.
To the extent this reduces information asymmetries for the bond being issued, underpricing may
decrease.6
While we do not attempt in this paper to resolve the large and ongoing debate between
potential explanations for underpricing, we do provide evidence for the overall impact of the
change in the information environment on pricing and dealer behavior. Our results are consistent
with a reduction over time in dealers’ local monopoly power, resulting in less price dispersion
and therefore lower measured underpricing, not including the notable market break in 2007 and
2008. We find no evidence that there is any increase in ex-ante underpricing related to the
introduction of transparency; more likely, there is a decrease. Further, we find no evidence that
dealers’ accumulate significant inventory positions, even when issues subsequently trade below
5
Papers by Bessembinder, Maxwell and Venkataraman (2007), Goldstein, Hotchkiss and Sirri (2007), and Edwards,
Harris and Piwowar (2007) find evidence of reduced effective spreads associated with the introduction of
transparency under TRACE. Reduced price dispersion will also lower measured dealer profits.
6
Models of underpricing based on asymmetric information include Rock (1986) and Benveniste and Spindt (1989).
Ljungqvist (2004) provides an extensive review of empirical studies of underpricing in equity IPOs.
3
the offering price.7 This finding is inconsistent with the idea that underpricing increases to offset
the risk that dealers might accumulate large inventory positions in the event of price declines in
the after-market.
Our paper also provides some of the first available descriptive evidence for trading
activity in newly issued bonds. Contrasting our results with those previously documented for
equity offerings allows us to consider whether the dealer behavior and trading activity we
observe is specific to bond markets, characteristic of dealer markets, or is more generally true for
new public issues of securities. Our descriptive evidence can be summarized as follows:

For each type of dealer (bookrunner, other underwriters, non-underwriters), trading
volume is considerably higher on the first 2 days of trading. After day 2, volume
continues to fall very slowly over the first 60 days and continues to fall over the next four
months.

Bookrunners and other managers’ market shares of volume fall after the first day of
trading, and then remain somewhat constant.
After the first week of trading, non-
underwriters market share of volume reaches just under 45% of total trading activity
based on the dollar volume of trade and nearly 60% based on the number of trades.

A large number of retail investors purchase bonds, and their entrance increases on the
third day of trading.8
Sales by these investors are significantly smaller in number
(approximately 5% to 10% of the number of buys).
The remainder of this paper proceeds as follows.
Section II describes our sample
construction and provides descriptive statistics for trading activity in the newly issued bonds.
Section III focuses on dealer behavior leading to price dispersion, and examines how the
7
8
We again do not include data from 2007 and 2008 to avoid issues related to the credit crisis.
We define “retail” trades as trades of less than 100 bonds. See footnote 17 for further explanation.
4
potential change in dealers’ market power due to the introduction of transparency is reflected in
the dispersion observed. Section IV describes the extent of underpricing and the relationship
between this underpricing and transparency. Section V examines how dealer inventory behavior
is related to the initial bond returns. Section VI concludes.
II. Sample description and trading activity for new issues.
With the July 2002 introduction of TRACE, all NASD (now FINRA) members were
required for the first time to report prices, quantities, and other information for secondary market
transactions in corporate bonds. Public dissemination of this trade information was phased in
over time based on the bond’s issue size and rating, allowing us to observe the relationship
between transparency and liquidity at each phase. Our dataset includes all trades reported to
TRACE in both opaque (pre-transparency) and transparent regimes, as well as all trades on 144A
bonds which are reported to FINRA but remain non-transparent.
The timing of reporting and dissemination rule changes is important to our regression
specifications and interpretation of the effects of time periods and transparency.
A brief
chronology is provided in Table 1. As of July 2002, trade information was collected by FINRA
but only publicly disseminated for investment grade bonds (rated BBB and above) with issue
sizes greater than $1 billion. In March 2003, dissemination was expanded to include all bonds
rated A or above with issue sizes greater than $100 million. In October 2004, dissemination was
expanded to include bonds rated BBB and below, with the exception of bonds which did not
meet a trading frequency threshold. However, dissemination of trade information for newly
issued bonds was delayed until day 3 of trading for BBB bonds, and until day 11 for lower grade
5
bonds.9 Lastly, on January 9, 2006, these delays were removed and trade information became
disseminated for all non-144A corporate bonds.
We divide our full sample period into
subperiods based on these changes, and a final period beginning March 2007 which corresponds
to the onset of the financial crisis.
Our sample of newly issued bonds includes all TRACE eligible bonds issued between the
July 2002 start of TRACE and May 2008 for which issuance information could be verified from
Mergent. This verification is done to accurately determine the first date on which trading can
begin, even when trades are not in fact observed in TRACE. We eliminate bonds issued in an
exchange or reorganization, medium term notes, foreign issues, and convertible bonds, and
include only bonds sold via a negotiated offering. We also retain only bonds for which the
identity of members of the underwriting syndicate is available from Dealogic. Finally, we
restrict our analysis to bonds which have at least ten trades in the first 20 trading days following
issuance. This produces a final sample of 4,122 newly issued bonds from 1,764 issuers. While
one issuer has 42 bonds in the sample, 54% of issuers have only one bond included and 84% of
issuers have 3 bonds or less. Results reported in this paper do not significantly change when we
exclude issuers with more than three bonds.
Characteristics of the sample of new issues are shown in Tables 2a and 2b. Issue sizes
are predominantly between $100 and $500 million (the mean and median issue sizes are $515
and $350 million, respectively, with a minimum issue size of $25 million). A large proportion of
issuers are financial companies. While the volume of issuance is heaviest in 2003 and the first
half of 2007, there are no substantial time concentrations of concern. Despite a decline with the
9
While the dissemination delays on less actively traded bonds were changed in February 2005 to apply only to
trades over $1 million, the delays in dissemination of newly issued bonds remained.
6
onset of the financial crisis, the number of issues remains substantial relative to earlier time
periods.
Rating category definitions follow the TRACE dissemination guidelines, using the lower
of the S&P or Moody’s rating at issuance. More than half the sample (60.6%) is investment
grade bonds (non-rated bonds are included with high yield). Only 113 of the 1,625 high yield
bonds are subject to immediate dissemination at issuance; this is because trades in high yield
bonds are not disseminated until later in the sample period and because high yield bonds are
predominantly issued as 144A offerings, the only type of corporate bonds not currently subject to
dissemination under TRACE.
To begin to understand the behavior of participants in this market, we report aggregate
trading volume over the first month of trading in Table 3.
Only secondary market trades (not
the primary offering) are reported to TRACE during this time period. However, in the event a
dealer holds bonds in inventory beyond the offering date, subsequent sales of those bonds may
be included in TRACE.10 We divide trades into size groups of greater than 100 bonds and less
than or equal to 100 bonds, since small trades are predominantly those of retail investors.11 The
TRACE data provided to us further classifies trades as interdealer trades, customer buys from a
dealer, or customer sales to a dealer. Retail size trades account for a small proportion of the face
amount traded, but a much larger proportion of the number of trades. For example, purchases of
100 bonds or less by customers on day 1 account for only $146 million in trade volume, but
10
Unlike equities, an underwriter for a non-convertible 144A or investment grade offering may begin trading in the
secondary market while still holding a portion of their initially allocated bonds (SEC Rule 10b-6 and Regulation
‘M’). Rules for trading in high yield non-144A bonds correspond more closely to those for equities.
11
Based on discussions with market participants, it is widely held that trades of more than 100 bonds are
institutional trades, while smaller trades are likely from retail accounts. This separation is further supported by
analysis done by a large clearing firm, showing that trades of 50 or fewer bonds almost entirely involve retail
investors. For our purposes, we assume that trades between 50 and 100 bonds are also retail, although they may
include a small number of institutional trades. We also observe that 144A bonds (which have no retail trading) have
extremely few trades less than 100 bonds.
7
consist of 4,595 trades. Interestingly, for large (institutional) sized trades, selling exceeds buying
for the first 3 days, after which buys and sells are more similar. Retail activity on the other hand
consists largely of customer buys, and increases over the first several days of trading. This
behavior likely reflects the practice by dealers of acquiring bonds from institutional investors or
in the interdealer market, and in turn distributing those bonds to retail investors.
Table 4 examines customer trades for the sample bonds. Two-thirds of the sample (2,729
bonds) trades on the first possible day of trading. We report the average and median daily
trading volume and number of trades per day for the first 10 trading days following issuance and
for longer periods up to 6 months from the issue date. Trading activity increases substantially
over the first two days, and then continues to decline (though not as rapidly) over the first six
months.
Our data also allow us to identify whether the dealer for a given trade is a member of the
underwriting syndicate for that bond.
Members of the underwriting syndicate are clearly
important to secondary market trading, but do not dominate trading as strongly as has been
documented for equity IPOs.12 Based on volume, the market share of trading by underwriters
falls from 81.3% after day 1 to 54.5% by day 10, and remains just under 50% for the six months
after issuance. Based on the number of trades, the market share of underwriters is smaller,
dropping from 52% on the first day to 33% or lower after three months since issuance. This drop
likely reflects the entry of non-underwriter dealers trading predominantly with smaller retail
investors.
The descriptive facts appearing from Tables 3 and 4 are important to our subsequent
analysis in several respects. We focus on customer buys for two reasons. First, trading by retail
12
Ellis, Michaely, and O’Hara (2002) report unaffiliated market makers have approximately a 30% share of trading
volume throughout the first 60 days of trading.
8
investors is dominated by customer purchases, and increases substantially by day 3 of trading.
Second, focusing on customer buys, our measures are not impacted by variation in bid-ask
spreads either across types of trades or across time. Based on the description from Tables 3 and
4, we also expect that behavior may change over the first days of trading as smaller retail
investors enter the market.
III. Price dispersion.
In this section, we examine price behavior during the first days of trading, and the
behavior of price dispersion over time. To provide an example of observed prices, Figure 1 plots
transactions prices for all customer trades in four individual bonds. Some striking patters appear
from these simple plots: trading prices exceed the offer price; there are marked differences
between institutional and retail sized trades; within trade size groups, there is considerable
variation of prices within the day; and the variation of prices within the day far exceeds the
variation from one day to the next, particularly for trades of 100 bonds or less.
Within-day price dispersion is therefore an important aspect of newly-issued bonds which
appears to vary based on trade size. To investigate this further, we measure price dispersion
using only customer buy transactions, and separately for large (> 100 bonds) and small (<= 100
bonds) trades. For each dealer trading in a given bond on a given day, we measure price
dispersion as the daily difference between the high and low prices for that dealer. Thus, our
measure shows the range of prices that customers pay for the same bond on the same day from
the same dealer.
Tables 5a and 5b summarize the incidence of price dispersion by trade size group, credit
rating, and time period. We also plot in Figure 2 our dispersion measure by the quarter of
9
issuance. We pool all observations for the first 10 days of trading. Ideally, our measure of
dispersion should reflect only dealer behavior, and not price differences due to a change in the
value of the bond during the day. For all reported results, we remove observations on days when
the Merrill Lynch 10 year corporate bond index return exceeds ± 0.75%, reducing the likelihood
of price dispersion due to bond market movements within the day, and we winsorize to remove
outliers. In Appendix Table 5, we report results for the subsample of bonds where a CDS quote
is available (from Markit) for that issuer, and remove observations where there is any change in
the issuer’s CDS quote from the previous day – this has a surprisingly small effect on our
measures of price dispersion. We also control for other factors that might increase the likelihood
that bond values change, for example, by requiring that trades be within the same hour (not
reported); this again has little impact on the magnitude or interpretation of our results.
Therefore, observed intraday price dispersion is not a result of underlying market movements or
a change in the issuer’s credit.13
For the highest quality bonds rated A or better, for the full time period, the mean price
dispersion is 22 basis points (BP) for larger trades (Table 5a) and 46 BP for smaller trades (Table
5b). However, the dispersion exceeds 50 BP for 11.5% of the observations for large trades and
28.1% of observations for smaller trades; for smaller trades, the dispersion is greater than 100BP
for 16.8% of observations.
Thus, even for institutional investors, the magnitude of price
dispersion is economically large; price dispersion is of similar magnitude to researchers’
estimates for total round trip trading costs on higher rated corporate bonds.14 For the larger
13
The magnitude of price dispersion also does not appear to be due to difference in pricing across trade sizes within
our trade size groups. For example, calculating price dispersion for bonds rated A & better using only trades
between 300 and 500 bonds, mean dispersion over the full sample period is 19 BP, similar to the mean for all large
sized trades in Table 5a; for trades between 10 and 14 bonds, mean dispersion is 45 BP, similar to Table 5b.
14
See, for example, Edwards, Harris, and Piwowar (2007); Bessembinder, Maxwell, and Venkataraman (2007);
Goldstein, Hotchkiss, and Sirri (2007).
10
trades, 50.7% of these observations are from dealers that are part of the underwriting syndicate.
A smaller proportion of observations for small trades is attributable to dealers who are part of the
underwriting syndicate.
For lower rated bonds, the magnitude of price dispersion is similar. Panel B shows that
the mean dispersion for larger trades on BBB bonds is 22 BP, and again 11.3% of observations
have dispersion greater than 50 BP; for smaller trades, the mean is 51 BP but 31.6% have
dispersion greater than 50 BP and 18.4% have dispersion greater than 100 BP. For large trades
in non-investment grade bonds, the mean dispersion is 28 BP. We caution that the number of
small sized trades in non-investment grade bonds is much smaller, since most non-investment
grade bonds are issued as 144A bonds and thus do not have retail trading. Still, 14.6% of small
trades in non-investment grade bonds have price differences greater than 100 BP.
It is informative to consider the variation in this behavior over time and as transparency is
introduced, potentially reducing dealers’ market power.
We divide the sample into five
subperiods, the first four corresponding to changes in transparency regimes and the fifth starting
with the onset of the financial crisis. For example, bonds rated A and higher are disseminated in
the first period ending March 2003 only if the issue size exceeds $1 billion; therefore, only
45.3% of observations for this group in Table 5a are transparent (disseminated) at the date of
issue. As shown in Table 5a, the mean dispersion for bonds rated A and higher during this first
period for institutional-sized trades is 28BP. However, starting in the second period, issue sizes
greater than $100 million are disseminated, and the mean price dispersion drops to 18BP for
large trades. By periods 3 and 4, all non-144A issues are disseminated, and the mean price
dispersion drops to about 14BP. With the onset of the crisis (period 5), dispersion increases to
29 BP, similar to the start of our sample period. We observe similar declines for smaller trades
11
(Table 5b) as well as for both large and small trades in the other rating groups, though small
trades in high yield bonds are limited as noted above. Overall, we find large decreases in price
dispersion over time, until the onset of the financial crisis, when price dispersion increases back
to earlier levels. This behavior is also apparent from the plots in Figure 2.
In Table 6, we report multivariate regressions to consider the impact of time periods and
transparency regime on price dispersion.
The dependent variable is observations of price
dispersion, and we pool observations for the first 10 days of trading. Note that these regressions
explain the magnitude, but not the incidence, of price dispersion. We use separate regressions to
control for the credit rating at issuance and trade size, as these are systematically related to the
time periods for dissemination. We also control for the overall level of trading activity for the
bond (number of trades in first month), overall market volatility (VIX), the information
environment (issuer has publicly traded stock and issuer has CDS quotes), and 144A status
(indicator variable non-144A). Standard errors (in parentheses) are clustered by issuer and
trading day.
Of primary interest are the time period dummies, and the interactions of these dummies
with an indicator for trades which are disseminated. Note that we include the interactions only
for time periods where there is some variation in whether bonds of that type are disseminated.
As discussed in Green’s 2007 Presidential Address, both the availability of information and
investors’ access to that information are important. For retail investors, although information
was available for larger and higher quality bonds from the start of TRACE, few retail brokers
subscribed to this information, and many investors were likely unaware of its availability. Even
for institutional investors, the number of users with immediate access to trading data from
12
TRACE has increased substantially over time.15 Thus, even if trade data were available under
transparency early on in TRACE, it is likely that some investors were better informed than
others, even among institutions.
The negative and significant coefficients for the time period dummies are broadly
consistent with the description in Table 5, that dispersion falls relative to period one until the
onset of the financial crisis, and the effect is more pronounced for smaller sized trades.
Understanding the is impact of transparency is complicated by the fact that whether a transaction
is disseminated depends both on the time period and bond characteristics. For example, for
bonds rated A and above, by periods four and five, the only bonds not disseminated are 144A
bonds (so a dummy for dissemination in those periods is equivalent to a dummy indicating non144A).16 Therefore, while Table 6 shows that dispersion appears to fall over time until the start
of the financial crisis, the impact of dissemination itself is less clear.
The final variable included in the regressions indicates whether the observation of
dispersion is from a dealer who is a member of the underwriting syndicate. The coefficient is
consistently positive across rating categories and trade sizes. This demonstrates that dealers
which are members of the syndicate contribute significantly to the magnitude of observed price
dispersion.
15
Based on information provided by FINRA, the number of institutional subscribers to undelayed TRACE data
increased almost linearly from July 2002 to approximately 12,000 in the first quarter of 2007. Retail brokers
subscribing to TRACE information were negligible at the start of TRACE. However, due to a change in pricing in
mid 2006, the number of retail brokers subscribing increased to approximately 12,000 in 2006 and 23,000 in 2007.
Since the July 2002 start of TRACE, however, historical price information has been available on a delayed basis
through the FINRA’s web site.
16
In Appendix Table 6, we test for larger trades whether this is likely attributable to 144A status by examining the
impact of non-144A using only Period 1 for A-rated bonds and only Periods 1 and 2 for other bonds – i.e. no bonds
in these subgroups are subject to dissemination. For bonds rated A and above, 144A status is not related to
dispersion. For lower rated bonds, non-144A bonds have significantly lower dispersion. These results appear
consistent with the negative coefficient for the non-144A variable in Table 6.
13
IV. Underpricing.
Previous literature has documented either no or small underpricing for corporate bonds.
Cai, Helwege and Warga (2006) examine bond trades by insurance companies and find
underpricing for both IPO and seasoned bond offerings, but it is significant (though small) only
for speculative grade bonds.17 For the municipal bond market, Green, Hollifield and Schurhoff
(2007b) show an increase in price relative to the offering price which occurs slowly over the first
few days of trading. In contrast to the corporate bond market, the behavior observed for
municipals is almost entirely due to price dispersion in trades by smaller retail investors.
Consistent with the literature describing price behavior for equity issues, we measure
underpricing as the percentage difference between the observed customer buy price and the
offering price. However, observed underpricing may be attributed both to dealer’s ability to
discriminate among investors (leading to the price dispersion documented in the previous
section) as well as the underwriters’ ex-ante pricing decision. Rather than using the closing price
on the first day of trade, we measure underpricing each day for the first 10 days from issuance.
We include only customer buy transactions in our calculations to eliminate the effects of the bidask spread, as these spreads are substantially larger than documented for equities and increase
with trade size. We also calculate underpricing separately using small and large trades.
Due to the confounding effects of price dispersion on underpricing measures, we report
underpricing as the percentage spread of customer buy prices over the offer price using two
different measures: first, using the volume weighted average daily customer buy price relative to
the offer price, and second, using the daily low customer buy price relative to the offer price.
Using the daily low price reduces, though does not eliminate, observed underpricing due solely
17
Other studies examining underpricing for bonds include Datta, Iskandar-Datta, and Patel (1997) who find
overpricing for some bonds, Helwege and Kleinman (1998), and Wasserfallen and Wydler (1988). Ours is the only
study to use comprehensive transactions data for new issues in the corporate bond market.
14
to dealers’ market power in the secondary market, i.e. the dispersion in prices due to market
makers’ ability to charge varying prices to customers for the same bond at the same time.
Regardless of the price used, it is clear from Table 7 that significant, positive, underpricing
occurs for corporate bonds.18 Panel A shows the daily underpricing pooled for the first ten days
since issuance; all reported mean and median spreads over the offer price are positive and
significantly different from zero for each rating group. This is true even when the impact of
price dispersion is reduced using the daily low price in the calculation. Underpricing increases
as rating falls, and large, institutional size trades have lower underpricing than smaller, retail
trades.
Panel B shows the underpricing by day since issuance, showing that underpricing
increases and becomes more significant by day 3 of trading.19 This is also apparent from the
plots in Figure 3; for investment grade bonds, underpricing is negligible until day 3, and is
substantially greater for non-investment grade bonds. The increases in underpricing are more
dramatic for smaller, retail trades than for larger, institutional trades, perhaps related to the
findings in Table 3 that retail trading increases over time.
At first glance, the percentage underpricing appears small relative to what has been
shown for equity markets. However, the dollar magnitude is large given the size of the bond
offerings. At a mean offering size of $515 million, the average underpricing for a BBB bond of
0.44% by day 3 is equal to almost $2.3 million “money left on the table”; for high yield offerings
the average underpricing of 1.05% is more than twice as large. Debt offerings are also a
18
We also show significant underpricing when we restrict the sample to days where there is no change in the
issuer’s CDS quote from the prior day (Appendix Table 7).
19
Results are not market adjusted, which potentially adds noise to our measure since we control for market
movements by removing all observations subsequent to a ± .75% or greater in the Merrill Lynch 10 year corporate
bond index return.
The magnitude of our results is also consistent with anecdotal evidence based on interviews with a number
of dealers providing comments related to the implementation of TRACE dissemination. These dealers typically
described a “successful” offering as one where the price rise in initial trading was approximately 0.125% for
investment grade issues and 0.25% for high yield issues.
15
relatively frequent event for these issuers in comparison to public equity offerings.
The
percentage spreads are positive and significant both for first time public bond issuers as well as
seasoned offerings (not reported for brevity).
The observed underpricing may be due both to market power of dealers in after-market
trading and/or underwriters’ ex-ante pricing decision. To reduce the effect of the former, the last
group reported in Table 7 shows underpricing for the subsample of bonds where dealers’ market
power is most likely to have been reduced – investment grade non-144A bonds issued in a
transparent market, a significant time subsequent to the start of TRACE (January 2006) but prior
to the financial crisis. As above, underpricing is smaller but positive and significant. Based on
simple univariate comparisons, however, the magnitude may have been reduced under
transparency.
We examine the behavior of underpricing over time using multivariate regressions
reported in Tables 8 and 9. The dependent variable is the percentage spread between the daily
low customer buy price and the offering price, pooling observations over the first 10 days of
trading. We report regressions using the daily low price since this lessens the impact of price
dispersion. We again report results separately using calculations based on trades > 100 bonds
(institutional trades) and trades <= 100 bonds (largely retail trades).
While we do not aim to test competing theories of underpricing as in other literature, we
still include controls for several other variables suggested by prior work to be related to
underpricing. We control for the number of trades in the first month, and find weak evidence
that underpricing is positively related to after-market liquidity (contrary to the predictions of
Ellul and Pagano (2006)). We also control for whether the firm has publicly traded stock, as
firms with private equity have less information available and less analyst following. This
16
variable is negative for the highest and lowest rated bonds, though for BBB bonds we observe a
positive coefficient.20 We also control for issue size, which is highly correlated with issuer size,
and again find that the results vary by rating category.
The coefficients for the time period dummies in Table 8 show that underpricing falls
fairly consistently relative to the earliest TRACE time period, across rating groups and trade
sizes. This finding holds even as we control for the dissemination regime (albeit related to bond
characteristics).
Table 9 reports similar regressions, except that we consider individual transactions rather
than average daily low bond price (see also Appendix Table 9 for observations where there is no
change from the prior day’s CDS quote).21 The dependent variable is the percentage spread
between an observed customer buy price and the offer price. Standard errors are clustered by
issuer and trading day. In addition to the control variables in the previous regressions, we also
include the log of trade size. Larger trades generally appear closer to the offering price. The
time period dummies again indicate underpricing is lower relative to the start of TRACE, except
for small trades in non-investment grade bonds; the difference from the previous table for
smaller trades is likely due to the fact that trades in these bonds is where much price dispersion is
observed.
Of key interest in these regressions is the variable indicating whether the dealer for that
trade is a member of the underwriting syndicate. Recall from the regressions in Table 6 that
underwriter trades are associated with higher price dispersion. If a reduction in price dispersion
20
Only 65% of high yield bonds are issued by firms with publicly traded equity, compared to 94.8% for investment
grade bonds.
21
These regressions are closer in spirit to those reported by Green, Hollifield and Schurhoff (2007b). Unlike their
results, we do not estimate a mixture model; instead we report regressions separately by trade size (greater or less
than 100 bonds) and the day of trade. Green, Hollifield and Schurhoff (2007b) show that size and day are the most
important determinants of whether an investor is likely to be “informed.”
17
over time is associated with greater underpricing, issuers will not benefit. For BBB rated bonds,
underwriter trades are farther above the offering price, but the magnitude is not great enough to
offset the declines in underpricing.
For the other rating categories, the coefficient for
underwriter trades is negative and significant, indicating trades closer to the offering price. For
smaller trades, although the coefficient is positive and significant for investment grade bonds, the
magnitude is again small relative to the time period dummies.
If dealer market power and/or ex-ante underpricing are reduced over time, the question
remains as to whether these changes translate into gains to the issuing company, or are largely a
reduction in dealer profits. As argued by Green (2007), a reduction in dealers’ ability to
discriminate among informed and uninformed investors will not necessarily benefit issuers.
Combined with Table 6, our results suggest that issuers likely benefit from a decline in
underpricing over time since the introduction of TRACE, particularly since much of the observed
behavior is related to trades by members of the underwriting syndicate.
V. Price behavior and dealer inventory.
A unique aspect of our dataset is that it identifies buy and sell transactions by dealer,
allowing us to calculate for each day the cumulative inventory position of a given dealer. In this
section, we examine how dealer inventory is related to the price behavior of the issue. Dealers
might face inventory risk in the event the issue were not received favorably or market conditions
were not as expected. Underwriters might therefore increase underpricing to offset this risk. We
therefore consider the effect on dealer inventory when issuers perform poorly, i.e. the price
trades below the offering price.
18
Price behavior in the after-market may impact observed dealer inventory in two ways.
First, although there are no explicit price stabilization requirements in this market, dealers may
accumulate inventory after the offering by repurchasing bonds placed with investors which have
subsequently declined in price. Second, unlike equities, underwriters may continue to hold a
portion of the issue after the initial offering; while primary market trades are not reported
through TRACE, these subsequent trades may be reported through TRACE as dealer sales to
customers. Thus, we may observe large negative long term inventory positions if dealers have
retained and later sold a significant fraction of the offering.
Table 10 reports dealer inventory positions as a percentage of the offering. For each
bond, inventory holdings are calculated for individual dealers, and then summed for all dealers of
a given type (underwriter or non-underwriter). For each of the first ten days following issuance,
we report inventory based on whether the bond trades at a price greater than or equal to (less
than) the offer price as of that day. The trading price is calculated as the average of prices for
customer buy transactions of over 100 bonds; if the bond does not trade on a given day, we use
the last previously reported price (or missing if there has been no trade since the issue date). We
do not divide our sample by market adjusted returns, since dealers potentially face inventory risk
in the event the market as a whole moves adversely at the time of the offering.
The results in Table 10 show that dealer inventory positions are typically not large. Even
when returns are poor, inventory for underwriters reaches a mean of only 2.17% of the issue
amount.
Median non-underwriter inventory remains near zero.
Comparing inventory of
underwriters based on whether the bond trades above or below the offer price, mean (median)
inventory are in fact higher when returns are negative, but while the differences are strongly
19
significant by day 10 they are not economically large. For example, mean inventory for negative
return observations exceeds that for positive return cases by 0.84%.
Still, larger inventory holdings may only occur in the case of more extreme negative
returns. Therefore, Panel B of Table 10 shows inventory of underwriters for the observations
where the price has fallen at least $1 or $2 below the offering price. This demonstrates the
magnitude of the increase in mean and median inventory at the extremes for our sample. At the
90th percentile, underwriters hold inventory of around 10% (price falls at least $1) and 12%
(price falls at least $2) of the issue.
Lastly, we consider whether the more extreme observations coincide with the onset of the
financial crisis, defined as March 2007 for our sample. It is interesting that the mean and median
returns are not significantly different when we compare bonds issued before and after the onset
of the crisis, though the proportion of bonds trading below the offer price is somewhat higher.22
The incidence of more extreme negative returns increases somewhat for the latter period. Precrisis, 9.7% of issues have fallen by day 10 to at least $1 below the offering price; this compares
to 11.6% post-crisis. Table 10C shows inventory holdings of underwriters separately for the preand post-crisis periods for cases of negative returns. Mean and median inventory increase in the
crisis period, but not by an economically large amount.
There are two possible interpretations for our results. The first is that dealers do not face
significant inventory risk, even under less favorable market conditions. The second possible
interpretation is that underwriters sufficiently underprice issues to reduce or even eliminate this
risk. The results in the prior sections, however, do not suggest any increase in underpricing over
22
Table 2a shows a decline in the number of new issues starting in the 3rd quarter of 2007. Thus it is possible that
some firms which would have experienced poor returns chose not to enter the new issues market during this period.
20
time as the market becomes more transparent, and particularly in the period of the financial
crisis.
VI. Conclusions.
This paper provides some of the first evidence on the behavior of dealers trading in newly
issued corporate bonds.
We find that there is economically and statistically significant
underpricing for corporate bond issues, but that the measured underpricing reflects both the
underwriters’ ex-ante pricing decision as well as price dispersion in after-market trading. Large
institutions are net sellers of bonds in the initial days of trading, while smaller sized retail
customers purchase bonds from non-syndicate member dealers at widely varying prices. We do
not find evidence that dealers underprice issues to offset inventory risk when issues trade below
the offering price.
We uniquely measure price dispersion as the difference in price paid across customer
buys from the same dealer for the same bond on the same day. While price dispersion can be
strikingly large, it appears that the magnitude and incidence of this behavior declines over time.
This behavior may reflect declining dealer market power with the increase usage of information
from TRACE over time. However, underpricing has not increased to offset declining market
power.
Our evidence also shows that non-underwriter dealers contribute significantly to the level
of trading activity and to observed price dispersion, particularly for smaller trades several days
after the offering. Thus, consistent with Green (2007), potential gains from transparency in the
secondary market may not pass through to issuing companies. Based on the declines in price
21
dispersion, however, it is clearer that both large and small investors benefit from the availability
of post-trade pricing information.
22
References
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Bergstresser, Daniel, Randolph Cohen, Siddharth Shenai, 2010, “Financial guarantors and the
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Bessembinder, H., W. Maxwell, and K. Venkataraman, 2006, “Optimal Market Transparency:
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Economics, 82:2, 251-288.
Cai, Nianyun, Helwege, Jean and Warga, Arthur, 2006, "Underpricing in the Corporate Bond
Market," Review of Financial Studies, forthcoming.
Chakravarty, S., and A. Sarkar, 2003, “A Comparison of Trading Costs in the U.S. Corporate,
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Ellis, K., R. Michaely and M. O’Hara, 2000, “When the Underwriter Is the Market Maker: An
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Goldstein, M., E. Hotchkiss and E. Sirri, 2007, “Transparency and Liquidity: A Controlled
Experiment on Corporate Bonds” Review of Financial Studies.
Green, R., B. Hollifield, and N. Schurhoff, 2007a, “Financial Intermediation and the Costs of
Trading in an Opaque Market,” Review of Financial Studies.
Green, R., B. Hollifield, and N. Schurhoff, 2007b, "Dealer Intermediation and Price Behavior in
the After-market for New Bond Issues," Journal of Financial Economics, forthcoming.
23
Green, R., “Issuers, Underwriter Syndicates, and After-market Transparency,” 2007 Presidential
Address, American Finance Association.
Harris, L. E. and M. Piwowar, 2006, “Secondary Trading Costs in the Municipal Bond Market,’
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Ljungqvist, Alexander, 2004, “IPO Underpricing,” published in Handbooks in Finance:
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Warga, A., 1991, “Corporate Bond Price Discrepancies in the Dealer and Exchange Markets,”
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24
Table 1
Sample Periods and Phase in of Post-Trade Transparency under TRACE
This table shows the dates and categories of corporate bonds subject to changes in dissemination rules. The full sample
period from July 2002 to July 2008 is divided into 5 sub-periods based on these changes. Periods 1 through 4 correspond to
changes in transparency regimes. The start of Period 5 corresponds to the March 2007 onset of the subprime crisis.
Start date Bonds becoming subject to dissemination:
Period 1
1-Jul-02 AAA, AA, A, BBB bonds with issue size >= $1 billion & FIPS 50 (high yield) or equivalent
Period 2
3-Mar-03 AAA, AA, or A bonds with issue size >= $100 million
Period 2
120 BBB bonds: "NASD will select the securities in consultation with independent economists
14-Apr-03 who will use the data from these securities as the basis for a study of the effect of price
transparency on liquidity"*
Period 3
1-Oct-04
Additional dissemination of investment grade and high yield (non-144A) ; delays on new issues;
excludes "lightly traded" bonds**
Period 3
7-Feb-05
Dissemination of all non-144A bonds ; delays on new issues and trades of over $1 million in
lightly traded bonds
Period 4
9-Jan-06 Immediate dissemination of ALL non-144A bonds
Period 5
1-Mar-07 Onset of subprime crisis
*
The selection of these BBB bonds is explained by Goldstein, Hotchkiss & Sirri (2007).
**
New issues begin dissemination at day 3 for BBB and day 10 for high yield, provided the bond trades at least once per day over the prior trading
days. For all other bonds, lightly traded is defined every 90 days as bonds trading less than once per day over the last 20 business days of that 90-day
period.
Table 2a
New Issues Sample Characteristics
Sample consists of 4,122 corporate bonds issued between July 2002 and May 2008. Bond characteristics are
identified from Mergent.
Callable
Non-callable
# bonds
% sample
3,374
748
81.9%
18.1%
144A
Non-144A
1,892
2,230
45.9%
54.1%
Issuer has publicly traded stock
3,294
79.9%
Issue size >= $1 billion
$750 <= issue size < $1 billion
$500 <= issue size < $750 million
$250 <= issue size < $500 million
$100 <= issue size < $250 million
Issue size < $100 million
575
254
775
1,496
992
30
13.9%
6.2%
18.8%
36.3%
24.1%
0.7%
Industry distribution:
Industrial
Finance
Utility
Other
2551
993
573
5
61.9%
24.1%
13.9%
0.1%
* 2 months ending May 31, 2008
Distribution by date of issue:
Qtr ending:
Sep-02
Dec-02
Mar-03
Jun-03
Sep-03
Dec-03
Mar-04
Jun-04
Sep-04
Dec-04
Mar-05
Jun-05
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
*May-08
# bonds % sample
96
141
216
270
176
201
206
147
172
190
153
141
140
129
151
175
137
194
221
266
134
163
120
183
2.3%
3.4%
5.2%
6.5%
4.3%
4.9%
5.0%
3.6%
4.2%
4.6%
3.7%
3.4%
3.4%
3.1%
3.7%
4.2%
3.3%
4.7%
5.4%
6.5%
3.2%
4.0%
2.9%
4.4%
Table 2b
New Issues Sample Characteristics - Continued
Distribution by lower of S&P, (Moody's) rating:
# bonds % sample
AAA (Aaa)
AA (Aa)
A (A)
BBB (Baa)
44
245
953
1255
1.1%
5.9%
23.1%
30.4%
BB (Ba)
B (B)
CCC (Caa)
CC (Ca)
C (C)
Not
No rated
ed
442
891
279
2
1
100
10.7%
21.6%
6.8%
0.0%
0.0%
0.2%
0.
%
Total
4,122 100.0%
2,497 investment
60.6% grade**
1,625 non39.4% investment
grade**
no
dissemination
day 1 (immediate)
dissemination *
eligible for delayed
dissemination *
# bonds % sample
# bonds % sample
# bonds % sample
25
31
203
648
0.6%
0.8%
4.9%
15.7%
19
214
750
456
0.5%
5.2%
18.2%
11.1%
151
3.7%
355
839
274
2
1
8
8.6%
20.4%
6.6%
0.0%
0.0%
0.
0.2%
%
64
43
4
1.6%
1.0%
0.1%
23
9
1
0.6%
0.2%
0.0%
2
0.0%
2,386
57.9%
1,552
37.7%
184
4.5%
* Non-144a bonds can be disseminated at issuance (either immediate or with delay) based on date of issue, issue size, and credit
rating. High yield bonds eligible for delayed dissemination which were issued between 10/1/2004 and 2/7/2005 are not ultimately
disseminated if trading activity in the first 10 days is less than 10 trades.
** 144A issues, which are not subject to dissemination, are 512/2,497 (21%) of investment grade, and 1,380/1,625 (85%) of noninvestment grade bonds.
Table 3
Aggregate trading volume by trade type
Sample consists of 4,122 newly issued corporate bonds. Trading day is relative to the offering date (day 1). Trade size
is based on the face amount traded. Trades are classified as interdealer, customer buys from a dealer, or customer sells
to a dealer.
Dollar volume of trade (in $ millions)
large trades (>100 bonds)
Trading day
1
2
3
4
5
6
7
8
9
10
20
interdealer
25,070
70,138
39,805
27,796
25,181
22,644
19,911
17,768
15,056
15,608
10,992
small trades (<= 100 bonds)
customer buys customer sells
63,807
70,193
41,701
53,236
26,268
22,353
21,048
18,531
16,372
17,089
11,642
interdealer
66,520
93,610
44,806
30,453
26,258
22,627
19,958
16,794
16,078
14,736
10,910
27
95
87
90
85
88
89
96
80
79
71
customer buys customer sells
146
172
193
217
193
206
195
219
185
198
144
53
72
27
22
24
17
18
20
17
20
23
Number of trades
large trades (>100 bonds)
Trading day
1
2
3
4
5
6
7
8
9
10
20
interdealer
10,769
26,561
13,799
9,806
8,668
7,475
6,582
5,712
5,327
5,427
3,953
small trades (<= 100 bonds)
customer buys customer sells
13,029
20,240
11,268
8,737
7,414
6,745
6,127
5,660
5,249
5,201
3,865
13,508
29,597
11,777
8,043
6,704
5,545
4,911
4,060
4,070
3,829
2,861
interdealer
533
1,946
2,301
2,572
2,212
2,412
2,554
2,759
2,322
2,399
2,133
customer buys customer sells
4,595
4,688
5,950
7,429
6,476
7,539
7,458
7,976
6,691
7,275
4,907
971
1,007
487
420
474
401
442
443
451
465
603
Table 4
Daily trading volume of customer trades
Sample consists of 4,122 newly issued corporate bonds. Average & median daily trading volume and number of trades per day are shown by trading day relative to
the issue date, where day 1 is the first possible trading day. Figures exclude all interdealer trades. "Non-zero bond trade/days" exclude bond days with no trades
from the averages and medians. Underwriter market shares are based on all transactions observed for dealers who are members of the underwriting syndicate as
determined from Dealogic.
All bond/days
Average
trading Average
volume number of
($000)
trades
Underwriter market
share
Non-zero bond trade/days
Median
trading
Median
volume number of
($000)
trades
Average
trading Average
volume number of
($000)
trades
Median
trading
Median
volume number of
($000)
trades
daily trading by
event day
# bonds
1
2
3
4
5
6
7
8
9
10
4,122
4,122
4,122
4,122
4,122
4,122
4,122
4,122
4,122
4,122
31,665
39,798
21,040
20,361
12,795
10,966
10,000
8,628
7,921
7,774
7.8
13.5
7.2
6.0
5.1
4.9
4.6
4.4
4.0
4.1
3,000
16,500
9,000
5,302
5,000
3,823
2,500
2,000
1,825
1,500
2.0
7.0
4.0
3.0
2.0
2.0
2.0
1.0
1.0
1.0
2,729
3,528
3,427
3,202
3,121
3,019
2,900
2,777
2,753
2,724
47,829
46,498
25,307
26,211
16,899
14,973
14,213
12,806
11,860
11,763
11.8
15.7
8.6
7.7
6.8
6.7
6.5
6.5
6.0
6.2
9,500
22,213
12,025
9,500
8,250
7,106
6,100
5,670
5,000
5,060
4.0
9.0
5.0
4.0
4.0
3.0
3.0
3.0
3.0
3.0
81.3%
59.2%
58.8%
69.1%
57.8%
55.1%
55.3%
54.9%
52.9%
54.5%
52.0%
46.0%
43.5%
40.9%
40.0%
39.5%
38.9%
41.9%
40.6%
40.0%
daily trading by
event month*
1
2
3
4
5
6
4,122
4,122
4,120
3,977
3,834
3,657
11,581
4,802
3,862
3,264
2,958
2,777
4.7
2.7
2.4
2.1
1.9
1.9
1,763
70
0
0
0
0
1.0
1.0
0.0
0.0
0.0
0.0
4,122
4,077
4,027
3,843
3,623
3,382
15,328
7,160
6,174
5,530
5,246
5,135
5.9
3.6
3.3
3.1
3.0
3.0
5,233
2,858
2,125
2,000
1,750
1,680
2.0
2.0
2.0
1.5
1.5
1.5
60.4%
51.2%
50.7%
48.9%
47.7%
47.1%
41.0%
34.7%
33.1%
32.6%
32.2%
32.1%
# bonds
* Trace dataset ends in July 2008; sample bonds issued in February through May 2008 have less than 6 months trading data available.
Share of Share of #
volume
trades
Table 5a
Price dispersion for trades > 100 bonds
Dispersion is measured for each bond and day as the difference in the high and low price between customer buys from a single dealer. Calculations include all customer buy
transactions for the first ten days of trading. Time periods are as defined in Table 1. Observations on days where the Merrill Lynch 10 year corporate bond index return exceeds ±
0.75% are excluded.
# obs
A. Bonds rated A & better
Period: all dates
1:
2:
3:
4:
5:
July '02 to Mar '03
April '03 to Sept '04
Oct '04 to Dec '05
Jan '06 to Feb '07
Mar '07 to Jul '08
B. Bonds rated BBB
Period: all dates
1:
2:
3:
4:
5:
July '02 to Mar '03
April '03 to Sept '04
Oct '04 to Dec '05
Jan '06 to Dec '06
Mar '07 to Jul '08
C. Bonds rated BB & below
Period: all dates
1:
2:
3:
4:
5:
July '02 to Mar '03
April '03 to Sept '04
Oct '04 to Dec '05
Jan '06 to Dec '06
Mar '07 to Jul '08
%
# bond
disseminated issues*
90th
Percentile
mean
3,860
79.8%
925
0.22
762
899
474
503
1,222
45.3%
82.9%
88.6%
91.1%
91.1%
156
194
156
138
281
0.28
0.18
0.13
0.14
0.29
2,416
50.0%
820
350
631
350
493
592
14.3%
27.7%
46.3%
77.3%
74.2%
6,509
378
2,210
1,088
1,468
1,365
% <25 BP
% 26-50
BP
% 51-100 % 101-200
BP
BP
% >200 BP
% of obs from
underwriters
0.55
72.8%
14.6%
7.9%
2.8%
0.8%
50.7%
0.71
0.46
0.32
0.33
0.69
65.6%
78.4%
84.6%
84.3%
64.0%
16.7%
11.8%
10.5%
10.3%
18.7%
10.5%
5.6%
2.5%
4.2%
11.6%
4.4%
2.7%
1.1%
0.4%
3.6%
1.2%
0.2%
0.4%
0.4%
1.2%
54.9%
46.1%
51.9%
53.1%
50.2%
0.22
0.54
71.3%
16.6%
8.5%
2.1%
0.7%
60.9%
115
207
127
152
219
0.26
0.24
0.19
0.19
0.23
0.66
0.59
0.45
0.45
0.54
65.8%
70.6%
76.6%
75.5%
68.6%
17.4%
15.5%
13.7%
16.6%
18.9%
12.0%
8.1%
6.0%
6.1%
10.3%
3.1%
3.6%
1.7%
1.2%
1.0%
0.9%
0.9%
0.9%
0.2%
0.7%
62.6%
59.9%
58.3%
64.1%
60.0%
9.0%
1,371
0.28
0.69
71.8%
15.2%
9.2%
2.7%
1.1%
49.0%
0.0%
0.0%
3.2%
20.0%
18.8%
93
515
275
238
250
0.42
0.32
0.26
0.23
0.26
1.00
0.75
0.63
0.52
0.63
65.7%
67.6%
74.4%
76.6%
72.9%
14.5%
17.0%
14.2%
13.4%
15.1%
10.8%
10.5%
8.2%
7.9%
8.7%
4.7%
3.3%
2.3%
1.5%
2.9%
4.2%
1.5%
0.9%
0.6%
0.3%
58.7%
50.5%
45.8%
50.1%
45.1%
a,b,c
: mean is significantly different from mean of all prior periods
* : number of new issues which have trades in 1st 10 days
a
a
a
a
a
a
a
a
a
a
Table 5b
Price dispersion for trades <= 100 bonds
Dispersion is measured for each bond and day as the difference in the high and low price between customer buys from a single dealer. Calculations include all customer buy
transactions for the first ten days of trading. Time periods are as defined in Table 1. Observations on days where the Merrill Lynch 10 year corporate bond index return
exceeds ± 0.75% are excluded.
# obs
%
# bond
disseminated issues*
90th
% 26-50 % 51-100
Percentile % <25 BP
BP
BP
mean
% 101200 BP
% >200
BP
% of obs from
underwriters
A. Bonds rated A & better
Period: all dates
1:
2:
3:
4:
5:
July '02 to Mar '03
April '03 to Sept '04
Oct '04 to Dec '05
Jan '06 to Feb '07
Mar '07 to Jul '08
4,491
83.9%
589
0.46
1.47
60.1%
11.4%
11.3%
12.2%
4.6%
23.3%
1,150
1,502
408
371
1,060
53.2%
89.5%
97.1%
99.7%
98.5%
103
162
82
76
166
0.52
0.49
0.28
0.24
0.50
1.55
1.55
1.10
1.00
1.54
55.0%
59.5%
73.0%
76.5%
55.6%
13.2%
10.4%
8.3%
7.0%
13.5%
14.0%
10.8%
6.4%
6.5%
12.5%
11.4%
13.6%
11.5%
8.6%
12.6%
6.0%
5.1%
0.5%
1.1%
5.2%
21.6%
23.6%
24.8%
28.8%
22.4%
1,269
62.3%
260
0.51
1.50
55.4%
12.3%
13.2%
13.8%
4.6%
25.6%
258
544
267
63
137
46.1%
48.0%
79.4%
98.4%
99.3%
41
90
49
29
51
0.58
0.54
0.45
0.28
0.47
1.75
1.50
1.27
1.00
1.58
52.3%
53.6%
55.1%
74.6%
59.9%
13.6%
11.9%
14.2%
6.3%
10.2%
12.8%
12.3%
16.1%
11.1%
13.1%
14.7%
17.4%
10.5%
3.2%
8.8%
5.8%
4.0%
3.4%
4.8%
7.3%
34.9%
25.7%
19.1%
22.2%
21.9%
582
28.0%
263
0.39
1.50
70.8%
6.7%
7.9%
11.3%
3.3%
35.1%
86
231
77
109
79
0.0%
0.0%
14.3%
79.8%
82.3%
34
114
49
38
28
0.61
0.30
0.26
0.46
0.42
2.00
1.45
1.00
1.60
1.50
64.4%
77.5%
80.5%
58.7%
65.8%
4.6%
4.3%
5.2%
16.5%
3.8%
8.0%
6.5%
3.9%
9.2%
13.9%
13.8%
9.5%
9.1%
11.9%
15.2%
9.2%
2.2%
1.3%
3.7%
1.3%
38.4%
38.1%
39.0%
28.4%
27.8%
a
a
b
B. Bonds rated BBB
Period: all dates
1:
2:
3:
4:
5:
July '02 to Mar '03
April '03 to Sept '04
Oct '04 to Dec '05
Jan '06 to Dec '06
Mar '07 to Jul '08
b
a
C. Bonds rated BB & below
Period: all dates
1:
2:
3:
4:
5:
July '02 to Mar '03
April '03 to Sept '04
Oct '04 to Dec '05
Jan '06 to Dec '06
Mar '07 to Jul '08
a,b,c
a
c
: mean for period is significantly different from mean from July'02 to end of prior period
* : number of new issues which have trades in 1st 10 days
Table 6
Regressions for price dispersion
Dependent variable is observations of price dispersion for the first 10 days of trading, using customer buy transactions and excluding days of larger market movements (Merrill
Lynch 10 year corporate bond index return exceeds ± 0.75%). Price dispersion is defined as the daily difference between high and lower customer buy prices for the same bond
on the same day from the same dealer. Time period dummies are as defined in Table 1. Standard errors are clustered by issuer and trading day.
Trades > 100 bonds :
A rated & above
BBB rated
0.131 (0.180)
a
0.248 (0.025)
a
0.198 (0.014)
0.004 (0.002)
c
0.005 (0.002)
b
-0.002 (0.003)
0.047 (0.033)
0.047 (0.021)
b
-0.014 (0.011)
-0.011 (0.017)
-0.007 (0.021)
# trades in 1st mo (*1000)
0.000 (0.000)
a
0.146 (0.013)
VIX
0.006 (0.002)
a
publicly traded stock
0.081 (0.075)
non-144A
-0.065 (0.036)
c
period 2 dummy
-0.068 (0.041)
c
period 3 dummy
-0.060 (0.065)
period 4 dummy
0.039 (0.071)
period 5 dummy
0.196 (0.049)
0.087 (0.034)
disseminated * period 3
0.078 (0.059)
disseminated * period 5
underwriter trades
a
0.004 (0.027)
disseminated * period 2
disseminated * period 4
A rated & above
a
0.013 (0.069)
disseminated * period 1
BB rated & below
0.213 (0.062)
Intercept
has CDS quotes
Trades <= 100 bonds :
-0.057 (0.023)
0.017 (0.037)
b
-0.042 (0.011)
a
-0.096 (0.023)
a
a
-0.112 (0.046)
0.050 (0.012)
a
0.318 (0.125)
b
-0.010 (0.007)
-0.019 (0.012)
c
0.141 (0.077)
c
0.147 (0.023)
a
-0.002 (0.055)
-0.049 (0.029)
c
-0.062 (0.082)
0.468 (0.180)
-0.028 (0.034)
-0.033 (0.080)
-0.008 (0.109)
-0.035 (0.050)
-0.062 (0.042)
-0.145 (0.068)
b
-0.294 (0.165)
-0.019 (0.058)
-0.125 (0.043)
a
-0.214 (0.070)
a
-0.252 (0.154)
0.020 (0.045)
-0.122 (0.037)
a
0.011 (0.045)
-0.098 (0.036)
a
0.008 (0.038)
0.047 (0.014)
a
-0.119 (0.079)
a
c
-0.093 (0.104)
a
0.084 (0.035)
b
0.113 (0.036)
a
0.093 (0.010)
a
0.372 (0.080)
a
-0.474 (0.161)
a
-0.573 (0.232)
b
-0.466 (0.264)
c
-0.434 (0.279)
0.043 (0.040)
0.279 (0.089)
a
0.035 (0.067)
-0.185 (0.069)
a
0.042 (0.103)
0.024 (0.043)
b
b
0.311 (0.080)
0.005 (0.038)
-0.024 (0.064)
0.773 (0.357)
0.167 (0.301)
-0.078 (0.139)
0.006 (0.053)
a
BB rated & below
BBB rated
0.061 (0.222)
-0.111 (0.174)
-0.142 (0.210)
0.232 (0.023)
a
0.297 (0.044)
a
0.159 (0.059)
Adj R2
0.05
0.06
0.04
0.08
0.08
0.10
N
3,858
2,414
6,505
4,490
1,269
582
a,b,c
: indicates coefficient is significantly different from zero at the 1%, 5%, or 10% level, respectively.
a
Table 7
Underpricing
Panel A. Underpricing over the first 10 trading days is measured as the percentage difference between the daily bond price and the offering price. Daily bond prices are
calculated either as the volume weighted average price of customer buys per bond per day, or as the daily low customer buy price per bond. Sample includes all bonds with
trades in the first 10 days of trading.
% spread of daily price over offer price, using trades >= 100 bonds
% spread of daily price over offer price, using trades < 100 bonds
weighted average
daily price
mean
median
weighted average
daily price
mean
median
daily low price
mean
median
# bonds # obs
daily low price
mean
median
# bonds # obs
A rated & above:
0.37%
a
0.20%
a
0.18%
a
0.04%
a
1,241
9,330
0.88%
a
0.68%
a
0.44%
a
0.32%
a
929
4,902
BBB rated
0.43%
a
0.27%
a
0.26%
a
0.12%
a
1,249
8,513
1.01%
a
0.77%
a
0.67%
a
0.46%
a
685
1,987
BB rated and below
1.06%
a
0.85%
a
0.78%
a
0.50%
a
1,621 12,068
1.54%
a
1.31%
a
1.35%
a
1.13%
a
949
2,309
Investment grade, disseminated
Jan 2006 to Feb 2007
0.19%
a
0.12%
a
0.07%
a
0.03%
a
0.58%
a
0.45%
a
0.33%
a
0.21%
a
232
936
a,b,c
351
: mean, median is significantly different from zero at the 1%, 5%, or 10% level, respectively.
2,596
Table 7 - continued
Panel B: Underpricing by trading day. All means and medians are significantly different from zero at the 1% level unless otherwise indicated; - indicates not
significantly different from zero; b,c indicate significantly different from zero at the 5% and 10% levels, respectively.
% spread of daily price over offer price, using trades >= 100 bonds
weighted average daily
price
trading
day
mean
median
weighted average daily
price
daily low price
mean
% spread of daily price over offer price, using trades < 100 bonds
median
# bonds
mean
median
daily low price
mean
median
# bonds
A rated & above:
1
2
0.14%
0.26%
0.06%
0.14%
-0.01% -0.02% -
0.00% 0.00% -
834
1,060
0.11%
0.67%
0.00%
0.44%
0.06%
0.41%
3
0.34%
0.21%
0.13%
0.04%
1,046
0.86%
0.64%
4
5
10
0.43%
0.43%
0.48%
0.28%
0.27%
0.39%
0.25%
0.25%
0.32%
0.13%
0.14%
0.27%
999
988
867
0.91%
0.93%
0.92%
0.21%
0.10%
0.05%
0.00%
-
829
-
b
0.00% 0.24%
158
380
0.48%
0.26%
471
0.68%
0.72%
0.77%
0.50%
0.48%
0.42%
0.34%
0.32%
0.39%
537
526
574
0.22%
0.00%
0.21%
0.00%
BBB rated
1
-
84
2
0.38%
0.24%
0.08%
0.00%
1,060
0.74%
0.55%
0.54%
0.33%
132
3
0.44%
0.31%
0.25%
0.15%
1,028
1.07%
0.81%
0.70%
0.45%
185
4
0.44%
0.28%
0.28%
0.15%
888
0.97%
0.78%
0.67%
0.51%
216
5
10
0.48%
0.50%
0.30%
0.46%
0.32%
0.37%
0.23%
0.36%
863
716
1.16%
0.96%
0.88%
0.83%
0.79%
0.65%
0.46%
0.63%
225
232
BB rated and below
-
1
0.78%
0.52%
0.27%
0.00%
1,191
1.00%
0.75%
0.79%
0.36%
297
2
1.01%
0.79%
0.56%
0.25%
1,460
1.41%
1.17%
1.24%
1.00%
383
3
1.05%
0.86%
0.75%
0.53%
1,372
1.52%
1.28%
1.32%
1.00%
261
4
1.06%
0.87%
0.80%
0.63%
1,295
1.66%
1.50%
1.50%
1.26%
222
5
10
1.07%
1.16%
0.86%
1.02%
0.84%
0.97%
0.63%
0.94%
1,243
1,038
1.65%
1.53%
1.51%
1.40%
1.46%
1.35%
1.30%
1.25%
214
191
241
0.16%
0.00% -
0.15%
Investment grade, disseminated Jan 2006 to Feb 2007
1
0.13%
0.07%
0.01% -
0.00% -
b
c
c
0.00% -
13
2
0.23%
0.14%
0.02%
0.00% -
305
0.45%
0.30%
0.25%
0.15%
59
3
4
0.21%
0.16%
0.14%
0.07%
0.07%
0.02% -
0.04% b
0.02% -
305
272
0.56%
0.50%
0.41%
0.35%
0.33%
0.30%
0.15%
0.18%
89
105
5
10
0.22%
0.23%
0.10%
0.19%
0.11%
0.12%
0.04%
0.12%
275
225
0.58%
0.60%
0.35%
0.48%
0.37%
0.34%
0.13%
0.28%
115
121
Table 8
Multivariate regressions for underpricing
The sample consists of investment grade bonds trading in the first 10 days following the offering date. The dependent variable equals the percentage difference between thedaily bond low price
and offering price. Time periods are defined in Table 1. Standard errors are shown in parentheses.
Trades > 100 bonds :
A rated & above
Intercept
# trades in 1st mo
publicly traded stock
log(issue size)
non-144a
period 2 dummy
period 3 dummy
BBB rated
-0.0043 (0.0024)
c
-0.0050 (0.0003)
a
-0.0021 (0.0006)
a
0.0008 (0.0002)
a
0.0002 (0.0006)
-0.0037 (0.0007)
a
-0.0035 (0.0009)
a
0.0144 (0.0029)
BB rated & below
a
0.0372 (0.0038)
-0.0137
(0.0043)
0.0075
(0.0087)
(0.0004)
a
-0.0010
(0.0009)
-0.0050 (0.0013)
0.0011 (0.0004)
-0.0033 (0.0003)
a
-0.0016
(0.0013)
-0.0006 (0.0002)
a
-0.0018 (0.0003)
a
0.0015
(0.0003)
-0.0029 (0.0004)
a
-0.0032 (0.0006)
a
-0.0022 (0.0004)
a
-0.0024 (0.0006)
a
-0.0053 (0.0006)
a
-0.0049 (0.0007)
a
-0.0049 (0.0007)
a
-0.0056 (0.0007)
a
-0.0072 (0.0007)
a
period 5 dummy
-0.0015 (0.0008)
c
-0.0016 (0.0006)
a
disseminated * period 1
-0.0042 (0.0007)
a
-0.0042 (0.0013)
a
disseminated * period 2
0.0014 (0.0007)
c
0.0015 (0.0010)
disseminated * period 3
-0.0004 (0.0009)
disseminated * period 4
-0.0030 (0.0010)
-0.0060
0.0018 (0.0007)
-0.0002 (0.0006)
a
a
0.0112
(0.0084)
0.0003
(0.0026)
-0.0045
(0.0008)
0.0007
(0.0007)
-0.0001
(0.0010)
-0.0014
(0.0012)
a
-0.0003
(0.0006)
(0.0012)
a
-0.0003
(0.0012)
(0.0014)
c
0.0025
(0.0012)
(0.0008)
a
-0.0023
(0.0021)
-0.0053
(0.0014)
a
-0.0059
(0.0008)
a
-0.0009
(0.0013)
-0.0060
(0.0016)
a
0.0002
(0.0007)
-0.0005
(0.0012)
-0.0066
(0.0016)
a
-0.0048
(0.0010)
0.0009
(0.0024)
-0.0006
(0.0013)
-0.0018
(0.0019)
-0.0027
(0.0021)
-0.0070
(0.0032)
b
-0.0011
(0.0019)
0.0052
(0.0019)
0.0040
-0.0025
-0.0052
a
a
b
Adj R2
0.05
0.03
0.04
0.07
0.02
0.03
N
9,330
8,513
12,068
4,902
1,987
2,309
a,b,c
: indicates coefficient is significantly different from zero at the 1%, 5%, or 10% level, respectively.
a
(0.0013)
0.0013 (0.0010)
0.0054 (0.0010)
BB rated & below
0.0039
0.0006 (0.0006)
a
BBB rated
a
a
-0.0006 (0.0005)
-0.0013 (0.0010)
0.0011 (0.0008)
A rated & above
a
a
period 4 dummy
disseminated * period 5
Trades <= 100 bonds :
a
Table 9 - multivariate regressions for underpricing
The sample consists of investment grade bonds trading in the first 10 days following the offering date. The
dependent variable equals the percentage difference between the observed bond transaction price and the offering
price. Time periods are defined in Table 1.
Trades > 100 bonds :
A rated & above
BBB rated
Intercept
0.864
(0.062)
a
# trades in 1st mo
0.000
(0.000)
a
0.000
(0.000)
-0.393
(0.013)
a
-0.075
(0.008)
log(issue size)
0.008
(0.004)
c
-0.236
log(trade size)
-0.049
(0.002)
a
0.033
0.722
(0.012)
a
underwriter trade
-0.039
(0.006)
period 2 dummy
0.151
period 3 dummy
-0.317
publicly traded stock
non-144a
BB rated & below
2.804
(0.083)
a
-0.001
(0.000)
a
a
-0.262
(0.007)
a
(0.005)
a
0.090
(0.007)
a
(0.002)
a
-0.205
(0.003)
a
-0.282
(0.007)
a
-0.282
(0.009)
a
a
0.055
(0.005)
a
-0.277
(0.006)
a
(0.013)
a
-0.360
(0.009)
a
-1.024
(0.013)
a
(0.017)
a
-1.134
(0.012)
a
-1.121
(0.014)
a
-0.647
(0.015)
a
-1.142
(0.015)
a
-1.098
(0.015)
a
3.965
(0.067)
a
period 4 dummy
-0.110
(0.030)
a
period 5 dummy
-0.321
(0.015)
a
-0.561
(0.014)
a
disseminated * period 1
-0.846
(0.018)
a
-0.249
(0.047)
a
disseminated * period 2
-0.368
(0.014)
a
1.127
(0.021)
a
disseminated * period 3
-0.285
(0.019)
a
0.206
(0.012)
a
0.174
(0.016)
a
0.123
(0.020)
a
0.317
(0.013)
a
0.150
(0.019)
a
disseminated * period 4
-0.437
(0.031)
a
disseminated * period 5
0.073
(0.015)
a
Adj R2
N
0.05
0.08
0.05
263,343
293,356
329,044
Trades <= 100 bonds :
A rated & above
BBB rated
BB rated & below
Intercept
0.347
(0.101)
a
11.680
(0.225)
a
-1.610
(0.262)
a
# trades in 1st mo
0.000
(0.000)
a
0.001
(0.000)
a
0.000
(0.000)
a
-0.571
(0.029)
a
0.327
(0.033)
a
-0.994
(0.028)
a
log(issue size)
0.008
(0.007)
-0.796
(0.017)
a
0.265
(0.022)
a
log(trade size)
-0.125
(0.005)
a
-0.018
(0.007)
b
-0.118
(0.012)
a
non-144a
1.425
(0.030)
a
-0.502
(0.037)
a
0.230
(0.032)
a
underwriter trade
0.128
(0.013)
a
0.128
(0.017)
a
-0.067
(0.023)
a
0.048
(0.026)
c
1.121
(0.031)
a
publicly traded stock
period 2 dummy
0.576
(0.022)
a
period 3 dummy
-0.626
(0.020)
a
-1.777
(0.045)
a
0.092
(0.031)
a
period 4 dummy
-0.817
(0.023)
a
-1.170
(0.034)
a
1.250
(0.045)
a
period 5 dummy
0.290
(0.017)
a
-1.142
(0.029)
a
0.496
(0.065)
a
1.022
(0.060)
a
-0.161
(0.037)
a
-0.010
(0.045)
-0.479
(0.126)
a
disseminated * period 4
-0.279
(0.060)
a
disseminated * period 5
1.558
(0.078)
a
disseminated * period 1
-0.252
(0.023)
a
disseminated * period 2
-0.821
(0.020)
a
disseminated * period 3
Adj R2
N
a,b,c
0.08
0.23
0.25
95,653
53,328
20,984
: indicates coefficient is significantly different from zero at the 1%, 5%, or 10% level, respectively.
Table 10 - Dealer inventory versus bond returns
Inventory holdings as a percentage of the offering amount are calculated for individual dealers, and then summed for all dealers of a given type
(underwriter, non-underwriter) for each bond. We define positive returns as cases where the bond trades at a price greater than the offer price.
The bond price on trading day t is calculated using the average of prices for customer buy transactions of over 100 bonds; if no trade occurs on
that trading day, the return is based on the last trade prior (or missing if there has been no trade by day t). P90 is the 90th percentiles.
Panel A:
Trading
day
Trading price falls below offer price
Trading price is above offer price
mean % median %
P90
% positive
inventory # bonds
mean % median %
P90
% positive
inventory # bonds
Difference in Difference in
means
medians
all underwriters
-0.06
a
0.34
0.23
b
717
0.14
0.30
803
0.26
1
0.11
0.00
2.54
40.5%
2,467
-1.03
-0.06
2.79
27.0%
204
-1.14
2
1.08
0.57
5.51
58.5%
3,207
1.42
0.80
7.25
57.3%
506
3
1.25
0.89
6.14
60.7%
3,258
1.38
1.19
7.70
62.6%
4
1.33
1.00
6.63
61.4%
3,232
1.60
1.30
8.26
62.9%
5
1.33
1.17
7.10
61.1%
3,202
1.82
1.30
8.53
63.4%
869
b
0.30
0.50
b
0.13
b
0.33
6
1.39
1.20
7.33
62.3%
3,175
1.94
1.53
8.77
62.8%
911
0.54
7
1.45
1.32
7.50
62.2%
3,140
1.81
1.53
8.91
64.0%
960
0.36
0.22
8
1.41
1.29
7.61
61.6%
3,058
1.81
1.51
8.87
64.2%
1,046
0.40
c
0.22 c
9
1.37
1.29
7.63
61.8%
3,035
2.00
1.56
9.14
63.6%
1,073
0.63
a
0.27
10
1.33
1.27
7.63
61.7%
2,998
2.17
1.77
9.71
64.4%
1,114
0.84 a
0.50 a
a
0.00 a
b
all nonunderwriters
1
0.37
0.00
1.90
47.1%
2,467
0.04
0.00
1.00
34.3%
204
-0.33
2
0.46
0.00
3.20
47.5%
3,207
0.32
0.00
3.49
44.3%
506
-0.14
0.00
3
0.36
0.00
3.40
46.3%
3,258
0.30
0.00
4.25
45.5%
717
-0.06
0.00
4
0.29
0.00
3.54
45.4%
3,232
0.22
0.00
4.29
46.2%
803
-0.07
0.00
5
0.20
0.00
3.79
44.9%
3,202
0.35
0.00
4.45
47.0%
869
0.15
0.00
6
0.14
0.00
3.90
43.8%
3,175
0.25
0.00
4.68
45.1%
911
0.11
0.00
7
0.07
0.00
3.89
43.3%
3,140
0.22
0.00
5.38
46.9%
960
0.15
0.00
8
0.01
0.00
4.00
42.7%
3,058
0.09
0.00
4.88
45.9%
1,046
0.08
0.00
9
-0.03
-0.03
4.00
41.9%
3,035
0.09
0.00
5.19
45.2%
1,073
0.12
0.03
10
-0.12
-0.10
4.05
41.7%
2,998
-0.01
0.00
5.07
45.2%
1,114
0.11
0.10
Table 10 - continued
Panel B: Underwriter inventory when trading price falls below offering price
Trading price falls at least $1 below offer price
Trading
day
1
2
3
4
5
6
7
8
9
10
mean % median %
-0.33
1.23
2.58
3.24
2.87
2.78
2.57
2.69
2.50
2.43
0.00
0.67
1.83
2.19
1.71
1.85
1.20
1.69
1.81
1.79
P90
1.02
11.71
10.07
11.06
11.00
11.43
9.97
9.99
9.88
10.36
# positive
inventory
3
13
66
106
133
167
193
226
252
273
Trading price falls at least $2 below offer price
# bonds
10
23
89
143
186
239
283
329
376
418
mean % median %
-2.29
-6.90
0.30
3.08
2.48
2.55
2.90
2.20
3.09
2.59
-2.29
-1.24
0.92
2.57
1.39
1.71
1.41
1.38
2.12
1.57
P90
-0.33
0.67
15.33
12.00
13.71
14.00
13.44
11.59
12.00
12.15
# positive
inventory
0
2
12
25
34
47
64
68
87
96
# bonds
3
6
19
35
49
71
93
107
126
146
Table 10 - continued
Panel C: Underwriter inventory when trading price falls below offering price - Pre vs. Post Crisis
Trading day
mean %
median %
% positive
inventory
P90
# bonds
Precrisis:
1
2
3
4
5
6
7
8
9
10
-1.01
1.19
1.34
1.37
1.55
1.61
1.53
1.60
1.81
1.99
-0.02
0.49
1.19
1.23
1.18
1.43
1.36
1.39
1.47
1.61
3.20
7.83
7.86
8.13
8.24
8.45
8.77
8.95
9.20
9.88
28.2%
54.4%
61.4%
61.1%
61.5%
60.3%
61.8%
62.5%
61.3%
61.6%
177
390
552
599
659
686
723
779
799
825
1
2
3
4
5
6
7
8
9
10
-1.16
2.17
1.51
2.24
2.66
2.90
2.64
2.41
2.52
2.65
-0.60
1.19
1.18
1.57
1.72
1.81
1.87
1.76
1.79
1.96
0.67
7.08
7.08
8.67
9.94
10.47
9.50
8.62
9.10
9.11
18.5%
67.2%
66.7%
68.1%
69.5%
70.2%
70.5%
69.3%
70.1%
72.3%
27
116
165
204
210
225
237
267
274
289
Post-crisis
Appendix Table 5a
Price dispersion for trades > 100 bonds - observations with no change in issuer's CDS quote
Sample includes only observations where CDS quote for the issuer is available and is unchanged from the day prior. Dispersion is measured for each bond and day as the
difference in the high and low price between customer buys from a single dealer. Calculations include all customer buy transactions for the first ten days of trading.
Observations on days where the Merrill Lynch 10 year corporate bond index return exceeds ± 0.75% are excluded.
%
# bond
# obs disseminated issues*
A. Bonds rated A & better
Period: full sample
1: July '02 to Mar '03
90th
% <= 25
Percentile
BP
mean
1,950
79.6%
504
0.22
380
33.4%
93
0.27
% 26-50 % 51-100
BP
BP
% 101200 BP
% >200
BP
% of obs from
underwriters
0.55
73.1%
14.4%
7.9%
3.1%
0.6%
48.4%
10.8%
4.7%
0.8%
53.4%
0.71
65.0%
17.1%
2: April '03 to Sept '04
482
88.4%
115
0.22
b
0.55
75.4%
12.0%
7.2%
3.7%
0.4%
46.3%
3: Oct '04 to Dec '05
219
84.0%
80
0.11
a
0.30
86.3%
9.6%
1.8%
1.4%
0.0%
43.8%
4: Jan '06 to Feb '07
272
94.1%
69
0.14
a
0.34
84.6%
9.9%
4.8%
0.4%
0.0%
52.2%
a
0.63
66.5%
18.3%
10.2%
3.5%
1.0%
46.7%
0.57
68.4%
18.1%
9.8%
2.1%
0.9%
62.7%
5: Mar '07 to Jul '08
597
93.6%
147
0.26
1,136
46.7%
435
0.24
B. Bonds rated BBB
Period: full sample
1: July '02 to Mar '03
192
9.9%
67
0.30
2: April '03 to Sept '04
273
12.8%
111
0.22
3: Oct '04 to Dec '05
146
49.3%
61
0.26
b
a
0.68
62.0%
17.2%
15.1%
3.6%
1.0%
67.7%
0.51
70.1%
18.2%
7.3%
2.2%
0.7%
63.7%
0.68
69.9%
14.4%
9.6%
3.4%
2.1%
62.3%
4: Jan '06 to Dec '06
201
77.1%
76
0.16
0.38
78.1%
16.9%
4.5%
0.5%
0.0%
61.7%
5: Mar '07 to Jul '08
324
77.2%
120
0.26
0.59
64.2%
21.0%
12.0%
1.5%
0.9%
59.6%
2,043
11.8%
457
0.28
0.63
71.4%
15.7%
9.1%
2.7%
1.0%
50.1%
1: July '02 to Mar '03
116
0.0%
26
0.36
1.00
63.8%
17.2%
10.3%
6.9%
1.7%
53.4%
2: April '03 to Sept '04
616
0.0%
167
0.29
0.69
70.8%
16.2%
8.3%
3.4%
1.0%
49.4%
3: Oct '04 to Dec '05
365
1.1%
99
0.31
0.75
69.0%
14.8%
11.8%
2.7%
1.6%
48.5%
0.50
75.3%
15.0%
7.5%
1.2%
1.0%
53.4%
0.63
71.6%
16.1%
9.3%
2.3%
0.2%
47.7%
C. Bonds rated BB & below
Period: full sample
a,b,c
4: Jan '06 to Dec '06
506
22.7%
79
0.24
5: Mar '07 to Jul '08
440
27.7%
86
0.26
: mean is significantly different from mean of all prior periods
* : number of new issues which have trades in 1st 10 days
a
Appendix Table 5b
Price dispersion for trades <= 100 bonds - observations with no change in issuer's CDS quote
Sample includes only observations where available CDS quote is unchanged from day prior. Dispersion is measured for each bond and day as the difference in the high and low
price between customer buys from a single dealer. Calculations include all customer buy transactions for the first ten days of trading. Observations on days where the Merrill
Lynch 10 year corporate bond index return exceeds ± 0.75% are excluded.
# obs
A. Bonds rated A & better
Period: all dates
1: July '02 to Mar '03
2: April '03 to Sept '04
%
disseminated
# bond
issues*
mean
2,214
81.8%
320
0.44
596
40.3%
62
0.55
693
94.8%
90
90th
% 26-50 % 51-100
Percentile % <25 BP
BP
BP
% 101200 BP
% >200
BP
% of obs from
underwriters
1.38
61.3%
12.2%
10.4%
11.0%
4.5%
22.3%
1.61
54.2%
13.6%
14.1%
11.2%
6.5%
18.8%
0.48
c
1.50
59.6%
11.4%
9.5%
13.4%
5.1%
23.1%
0.78
75.9%
9.4%
6.3%
8.4%
0.0%
20.4%
0.82
77.3%
6.5%
7.4%
6.9%
1.4%
29.2%
3: Oct '04 to Dec '05
191
97.4%
44
0.23
a
4: Jan '06 to Feb '07
216
99.5%
39
0.24
a
5: Mar '07 to Jul '08
518
99.2%
85
0.43
1.36
59.7%
15.1%
10.0%
10.0%
4.2%
23.2%
589
55.3%
133
0.54
1.61
53.4%
11.9%
15.8%
12.2%
5.9%
28.7%
137
37.2%
23
0.64
1.95
45.3%
16.1%
15.3%
16.1%
5.8%
40.1%
B. Bonds rated BBB
Period: all dates
1: July '02 to Mar '03
a
2: April '03 to Sept '04
233
37.8%
54
0.43
1.31
62.0%
9.0%
14.1%
10.3%
3.8%
29.6%
3: Oct '04 to Dec '05
119
73.9%
23
0.62
1.75
46.2%
13.4%
18.5%
15.1%
6.7%
21.8%
4: Jan '06 to Dec '06
18
94.4%
7
0.36
2.05
72.2%
5.6%
11.1%
0.0%
11.1%
22.2%
5: Mar '07 to Jul '08
82
100.0%
26
0.60
1.72
48.8%
12.2%
18.3%
9.8%
9.8%
18.3%
198
29.3%
86
0.41
1.50
66.7%
10.6%
9.1%
9.1%
4.5%
35.4%
48
0.0%
14
0.74
C. Bonds rated BB & below
Period: all dates
1: July '02 to Mar '03
2: April '03 to Sept '04
60
0.0%
34
0.36
b
3: Oct '04 to Dec '05
25
0.0%
16
0.17
a
2.50
52.1%
8.3%
10.4%
16.7%
12.5%
25.0%
1.13
68.3%
10.0%
11.7%
6.7%
3.3%
48.3%
0.95
88.0%
0.0%
4.0%
8.0%
0.0%
36.0%
4: Jan '06 to Dec '06
41
90.2%
14
0.22
0.50
68.3%
24.4%
2.4%
4.9%
0.0%
36.6%
5: Mar '07 to Jul '08
24
87.5%
8
0.41
1.25
66.7%
4.2%
16.7%
8.3%
4.2%
20.8%
a,b,c
: mean is significantly different from mean of all prior periods
* : number of new issues which have trades in 1st 10 days
Appendix Table 6
Regressions for price dispersion: Impact of 144A status during non-dissemination periods
Sample includes only non-disseminated bonds, using transactions from Periods 1 and 2, and excluding bonds with issue
amounts < $100 million and $1 billion. Small trades of 100 bonds or less are also excluded. The dependent variable is
observations of price dispersion for the first 10 days of trading, using customer buy transactions and excluding days of
larger market movements (Merrill Lynch 10 year corporate bond index return exceeds ± 0.75%). Time period dummies
are as defined in Table 1. Standard errors are clustered by issuer and trading day.
A rated & better
BBB
BBB and below
Variable
0.391
(0.136)
a
0.396
(0.109)
a
0.001
(0.000)
a
0.000
(0.000)
a
(0.006)
-0.003
(0.004)
0.000
(0.003)
(0.097)
-0.037
(0.044)
Intercept
0.316
(0.253)
# trades in 1st mo (*1000)
0.000
(0.000)
-0.004
0.035
VIX
publicly traded stock
non-144A
underwriter trades
Issue quarter
a
-0.024
(0.022)
-0.109
(0.033)
a
-0.048
(0.079)
-0.115
(0.030)
a
0.056
(0.045)
0.081
(0.029)
a
0.115
(0.020)
a
-0.026
(0.027)
-0.023
(0.011)
b
-0.022
(0.008)
a
N
308
699
2,576
Adj R2
0.05
0.08
0.03
Appendix Table 7
Underpricing - Observations on days with no change in issuer's CDS quote
Panel A: Underpricing over the first 10 trading days is measured as the percentage difference between the daily bond price and the offering price. Daily bond prices are
calculated either as the volume weighted average price per bond per day, or as the daily low price per bond. Sample includes all bonds with trades in the first 10 days of trading,
and includes only observations for bonds where the issuer's change in CDS quote from the previous day is zero.
% spread of daily price over offer price, using trades >= 100 bonds
weighted average
daily price
daily low price
mean
median
mean
# bonds
median
# obs
% spread of daily price over offer price, using trades < 100 bonds
weighted average
daily price
daily low price
mean
median
mean
median
# bonds
# obs
A rated & above:
0.40%
a
0.22%
a
0.22%
a
0.05%
a
735 5,324
0.93%
a
0.69%
a
0.50%
a
0.34%
a
548
2,751
BBB rated
0.48%
a
0.31%
a
0.32%
a
0.16%
a
732 4,880
1.08%
a
0.87%
a
0.76%
a
0.55%
a
427
1,220
BB rated and below
Investment grade, disseminated
Jan 2006 to Feb 2007
0.86%
a
0.64%
a
0.60%
a
0.38%
a
606 4,373
1.51%
a
1.25%
a
1.31%
a
1.00%
a
346
849
0.12%
a
0.12%
a
0.08%
a
0.04%
a
193 1,388
0.47%
a
0.41%
a
0.26%
a
0.17%
a
125
466
a,b,c
: mean, median is significantly different from zero at the 1%, 5%, or 10% level, respectively.
Appendix Table 9
Multivariate regressions for underpricing: observations with no change in issuer's CDS quote
The sample consists of investment grade bonds trading in the first 10 days following the offering date. The dependent
variable equals the percentage difference between the observed bond transaction price and offering price. Time period
dummies are defined in Table 5. Standard errors are shown in parentheses.
Trades > 100 bonds :
A rated & above
BBB rated
Intercept
1.188
(0.100)
a
# trades in 1st mo
0.000
(0.000)
a
a
BB rated & below
(0.115)
a
1.229
(0.162)
a
(0.000)
a
-0.001
(0.000)
a
0.104
(0.015)
a
-0.721
(0.013)
a
-0.204
(0.009)
a
0.249
(0.013)
a
3.139
0.000
publicly traded stock
-0.133
(0.021)
log(issue size)
-0.011
(0.007)
log(trade size)
-0.037
(0.004)
a
0.066
(0.004)
a
-0.216
(0.006)
a
non-144A
0.251
(0.019)
a
-0.293
(0.012)
a
-0.339
(0.019)
a
underwriter trade
0.015
(0.009)
c
0.157
(0.008)
a
-0.264
(0.012)
a
-0.380
(0.013)
a
-1.045
(0.026)
a
period 2 dummy
-0.065
(0.022)
a
period 3 dummy
-0.523
(0.026)
a
-1.118
(0.019)
a
-0.906
(0.028)
a
period 4 dummy
-0.596
(0.045)
a
-0.263
(0.025)
a
-1.286
(0.030)
a
period 5 dummy
-0.230
(0.027)
a
-0.291
(0.022)
a
-1.198
(0.029)
a
0.470
(0.040)
a
0.603
(0.040)
a
disseminated * period 1
-0.850
(0.030)
a
-0.839
(0.064)
a
disseminated * period 2
-0.225
(0.023)
a
0.921
(0.042)
a
disseminated * period 3
-0.217
(0.029)
a
0.156
(0.021)
a
disseminated * period 4
0.021
(0.046)
-0.273
(0.027)
a
disseminated * period 5
-0.005
(0.027)
0.027
(0.022)
Adj R2
N
0.03
0.10
0.07
95,567
85,383
103,411
Trades <= 100 bonds :
A rated & above
Intercept
-0.729
BBB rated
(0.174)
a
5.021
BB rated & below
(0.428)
a
-1.773
(0.515)
a
0.000
(0.000)
a
0.000
(0.000)
a
0.000
(0.000)
-1.200
(0.076)
a
0.470
(0.053)
a
-1.102
(0.048)
a
log(issue size)
0.160
(0.011)
a
-0.250
(0.033)
a
0.334
(0.043)
a
log(trade size)
-0.118
(0.009)
a
-0.211
(0.012)
a
-0.169
(0.019)
a
1.303
(0.066)
a
-0.317
(0.060)
a
0.212
(0.050)
a
0.034
(0.029)
-0.360
(0.042)
a
# trades in 1st mo
publicly traded stock
non-144A
underwriter trade
0.046
(0.022)
b
period 2 dummy
0.365
(0.040)
a
0.159
(0.042)
a
0.443
(0.059)
a
period 3 dummy
-1.078
(0.036)
a
-1.123
(0.066)
a
0.129
(0.058)
b
period 4 dummy
-0.964
(0.040)
a
-0.955
(0.059)
a
0.999
(0.091)
a
-0.003
(0.119)
disseminated * period 4
-0.281
(0.112)
disseminated * period 5
1.755
(0.136)
0.486
(0.028)
a
-1.126
(0.046)
a
disseminated * period 1
-0.449
(0.044)
a
0.420
(0.097)
a
disseminated * period 2
-0.789
(0.037)
a
0.411
(0.063)
a
0.018
(0.064)
period 5 dummy
disseminated * period 3
Adj R2
N
a,b,c
0.11
0.15
0.20
37,768
16,963
7,967
: indicates coefficient is significantly different from zero at the 1%, 5%, or 10% level, respectively.
b
Figure 1 : Examples of price behavior for sample bonds
A. BBB rated non-144A bond, disseminated at issuance
Customer sells
109
108
109
107
106
107
106
105
104
103
105
108
price
price
Customer buys
104
103
102
101
102
101
100
99
100
99
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19 20
1
2
3
4
5
6
7
8
trading day
9
10 11 12 13 14 15 16 17 18 19 20
trading day
B. B rated non-144A bond, not disseminated at issuance
Customer sells
105
105
104
104
103
103
102
102
price
price
Customer buys
101
trades > 100 bonds
trades <= 100 bonds
offer price
101
100
100
99
99
98
98
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19 20
trading day
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20
trading day
trades > 100 bonds
trades <= 100 bonds
offer price
Figure 1 - continued
C. A rated non-144A bond, disseminated at issuance
Customer sells
Customer buys
104
103.5
103.5
103
103
102.5
102.5
102
102
price
price
104
101.5
101.5
101
101
100.5
100.5
100
100
99.5
99.5
99
99
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19 20
1
2
3
4
5
6
7
8
9
trading day
10 11 12 13 14 15 16 17 18 19 20
trading day
trades <= 100 bonds
offer price
D. A rated 144A bond, not disseminated at issuance
Customer sells
Customer buys
105.5
105.5
105
105
104.5
104.5
104
104
103.5
103.5
103
price
price
trades > 100 bonds
102.5
103
102.5
102
102
101.5
101.5
101
101
100.5
100.5
100
100
99.5
99.5
1
2
3
4
5
6
7
8
9
10 11 12
trading day
13
14
15
16
17
18
19
20
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19 20
trading day
trades > 100 bonds
trades <= 100 bonds
offer price
Figure 2
Price dispersion by quarter of issuance
Boxes show the 25th percentile, median, and 75th percentile of dispersion, as defined in Table 5. Vertical lines indicate the
minimum and maximum dispersion for the quarter, with positive outliers set to 200 BP. + indicates the mean dispersion for
the quarter.
A. Bonds Rated A and Above
Trades > 100 bonds
Dispersion:
200 BP
150 BP
100 BP
50 BP
0 BP
Oct '07
Oct '07
Oct '06
Oct '05
Oct '04
Oct '03
Oct '02
issue quarter
issue quarter
Trades <= 100 bonds
Dispersion:
200 BP
150BP
100 BP
50 BP
0 BP
Oct '06
Oct '05
Oct '04
Oct '03
Oct '02
B. Bonds rated BBB
Trades > 100 bonds
200 BP
150 BP
100 BP
50 BP
0 BP
Oct '06
Oct '07
Oct '06
Oct '07
Oct '05
Oct '04
Oct '03
Oct '02
issue q
issue q
Trades <= 100 bonds
200 BP
150BP
100 BP
50 BP
0 BP
Oct '05
Oct '04
Oct '03
Oct '02
C. Bonds rated BB and below
Trades > 100 bonds
200 BP
150 BP
100 BP
50 BP
0 BP
Oct '06
Oct '07
Oct '06
Oct '07
Oct '05
Oct '04
Oct '03
Oct '02
issue q
issue q
Trades <= 100 bonds
200 BP
150 BP
100 BP
50 BP
0 BP
Oct '05
Oct '04
Oct '03
Oct '02
Figure 3
Underpricing over first 10 days of trade by rating group. Underpricing is calculated as the difference between the daily bond
price and the offering price, where the daily bond price is the weighted average of customer buy prices in the day or the daily
low price. Plots include only transactions > 100 bonds.
0.014
w.a. underpricing, AAA rated &
above
0.012
daily low underpricing, A rated &
above
0.01
w.a. underpricing, BBB rated
0.008
daily low underpricing, BBB
0.006
w.a. underpricing, BB rated & below
0.004
daily low underpricing, BB rated &
below
0.002
0
trading day relative to offer date
1
‐0.002
2
3
4
5
6
7
8
9
10