Debt issue costs and issue characteristics in the market for U.S. dollar denominated international bonds

Arie Melnik, Doron Nissim

Research output: Contribution to journalReview articlepeer-review

Abstract

This paper analyzes the issue costs and initial pricing of bonds in the international market. In particular, we investigate the determinants of three components of issue costs: underwriter fee, underwriter spread (the difference between the offering price and the guaranteed price to the issuer), and underpricing (the difference between the market price and the offering price). Total underwriter compensation increases with the bonds' credit risk and maturity, but it is insignificantly related to issue size. Interestingly, underwriters appear to price some issue characteristics directly (by adjusting the fee) and other characteristics indirectly (by setting the guaranteed price). The two compensation components (fee and spread) are negatively related to each other. We provide evidence that this tradeoff is consistent with income tax considerations, as well as with two-tier pricing by underwriters. We find no evidence of underpricing.

Original languageEnglish
Pages (from-to)277-296
Number of pages20
JournalEuropean Finance Review
Volume7
Issue number2
DOIs
StatePublished - 2003

Keywords

  • International bonds
  • Issue costs
  • Underpricing
  • Underwriter compensation

ASJC Scopus subject areas

  • General Economics, Econometrics and Finance

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