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RFS Advance Access published online on September 28, 2007
Review of Financial Studies, doi:10.1093/rfs/hhm048
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Copyright © The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies.

Underpricing in the Corporate Bond Market

Nianyun (Kelly) Cai
University of Michigan at Dearborn

Jean Helwege
Pennsylvania State University

Arthur Warga
University of Houston

Address correspondence to Jean Helwege, Smeal College of Business, Pennsylvania State University, University Park, PA 16802 or e-mail: juh20{at}psu.edu

JEL: G12, G14, G24


  Abstract

This article examines underpricing of initial public offerings (IPOs) and seasoned offerings in the corporate bond market. We investigate whether underpricing represents a solution to an information problem or a liquidity problem. We find that underpricing occurs with both IPOs and seasoned offerings and is highest among riskier, unknown firms. Our evidence suggests that information problems drive underpricing, with support for both the bookbuilding view of underpricing and the asymmetric information theory. We do not find evidence in favor of the Rock model of underpricing or any evidence that illiquidity causes underpricing.

We are grateful to an anonymous referee and Kathy Kahle, Hei-Wai Lee, Rodolfo Martell, Eric Oberg, Rene Stulz, Senay Agca and seminar participants at the University of Arizona, Carnegie Mellon University, UC Irvine, Ohio State University, University of Manitoba, the 2002 Financial Management meetings, and the 2003 National Forum on Corporate Finance. Yingying Wang provided excellent research assistance. Any errors are the authors' alone.


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