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Conditional conservatism and underpricing in US corporate bond market

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  • M. Liu
  • M. Magnan

Abstract

Building upon recent research suggesting that debt markets rather than equity markets shape financial reporting, this study examines the relationship between conditional conservatism (used as a proxy for information risk) and the underpricing of newly issued corporate bonds. There are two contrasting arguments for bond underpricing: the information argument predicts that bond issuers with less information risk will experience less underpricing, while the signalling argument indicates that bond issuers with less information risk will underprice more to distinguish them from issuers with more information risk. Empirical results indicate that the signalling argument seems to better capture the dynamics of the public debt markets, with conditional conservatism being associated with greater underpricing of newly issued corporate bonds.

Suggested Citation

  • M. Liu & M. Magnan, 2014. "Conditional conservatism and underpricing in US corporate bond market," Applied Financial Economics, Taylor & Francis Journals, vol. 24(20), pages 1323-1334, October.
    • Handle: RePEc:taf:apfiec:v:24:y:2014:i:20:p:1323-1334
    DOI: 10.1080/09603107.2014.925059
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    Cited by:

    1. Rischen, Tobias & Theissen, Erik, 2018. "Underpricing in the euro area corporate bond market: New evidence from post-crisis regulation and quantitative easing," CFR Working Papers 18-03, University of Cologne, Centre for Financial Research (CFR).
    2. Rischen, Tobias & Theissen, Erik, 2021. "Underpricing in the euro area bond market: New evidence from post-crisis regulation and quantitative easing," Journal of Financial Intermediation, Elsevier, vol. 46(C).
    3. Leonie Herrmann, 2017. "Mittelstandsanleihen und ihre privaten Investoren [German SME-bonds and their private investors]," Schmalenbach Journal of Business Research, Springer, vol. 69(3), pages 245-273, September.
    4. Mingzhi Liu & Michel Magnan, 2016. "Conditional conservatism and the yield spread of corporate bond issues," Review of Quantitative Finance and Accounting, Springer, vol. 46(4), pages 847-879, May.

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