Underpricing in corporate bonds: empirical evidence from Brazil

Abstract

This work studies the presence of underpricing on corporate bonds in Brazil, and how different factors impact it. The effect can be defined as the difference between the initial public price of the asset offered and its price on the first day of trading. Based on analyses made with over 800 corporate debt issues, we find, using linear regression, evidence that underpricing is present in the Brazilian market, with first trades in the secondary market presenting a premium over-issuance. The tests suggest that during periods of economic stress underpricing is intensified in Brazil; Having a big bank as a lead under writer is not relevant to explain the effect. Asymmetric information is a relevant driver for under pricing; Liquidity has an impact on pricing, but it is related to the type of instrument instead of the amount issued or traded.