The Determinants of Underpricing for Newly-issued and Tack-on Corporate Bond Offerings

Tack-on bond issues are additional offerings, with the same terms and CUSIP, of an existing bond series. We provide comprehensive evidence of systematic underpricing for newly-issued and tack-on corporate bonds. These bonds are offered at prices significantly below their immediate post-offer secondary market prices. We also find significant underpricing of very highly rated bond offerings and the underpricing increases as credit worthiness declines. By exploiting the features of tack-on offerings, we show that underpricing is partially attributable to price pressure effects. We also test existing underpricing theories and find evidence supporting the valuation uncertainty and information asymmetry hypothesis.