Dr. Liying Wang, assistant professor of finance at the University of Nebraska–Lincoln College of Business, examines how the corporate bond offering price evolves in the primary market, where securities are created, before underwriters, who determine risk levels on transactions, allocate the bonds to investors. While a popular view is that corporate bonds are easy to price so that underwriters know all information they need, her research suggests this is not the case.
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Using newly available data on initial prices, this study is the first to analyze the price-updating process associated with corporate bond (CB) offerings. Similar to the case for equity IPOs, the evidence shows bookbuilding theories help explain the CB offering price. In particular, CB price updates reduce underwriters’ pricing errors. The partial adjustment phenomenon exists, and underwriters propose a lower initial price in cases of greater uncertainty. However, the CB price update has a large mean value and is smaller for lower-rated offerings, indicating part of the CB price update is unrelated to investors’ information production.