Working Paper: NBER ID: w26815
Authors: Yi Ding; Wei Xiong; Jinfan Zhang
Abstract: We document issuance overpricing of corporate debt securities in China, which contrasts with underpricing of equity and debt securities in Western countries. The phenomenon in China is robust across subsamples of issuances with different credit ratings, maturities, issuer types, and issuing history, reflecting the distinct institutional environment and issuance process in China’s market for corporate debt securities. The average overpricing dropped from 7.44 basis points to 2.41 basis points after the government prohibited underwriters from using rebates in issuances in October 2017. By analyzing overpricing before and after the rebate ban and across different issuers and underwriters, we uncover two channels for underwriters, who compete for future underwriting business, to drive up overpricing: rebates and self-purchases.
Keywords: Corporate debt securities; Issuance overpricing; China; Underwriter competition; Rebate ban
JEL Codes: G15; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rebate ban (L42) | decrease in overpricing (D49) |
| rebate system (L42) | increase in overpricing (D49) |
| rebate ban (L42) | greater reduction in overpricing for central SOEs (L11) |
| underwriters acquiring more securities (G24) | higher overpricing (D49) |
| underwriter practices (G22) | issuance overpricing (G24) |