The Determinants of Corporate Bond Underpricing in Times of Quantitative Easing - an Analysis of the European Investment Grade Bond Market

Abstract: This study examines the determinants of bond underpricing in the EUR corporate investment grade space. Moreover, it assesses whether the European Central Bank (ECB), through its quantitative easing, has caused a structural change in bond underpricing. Insights on the nature of underpricing and the ECB's influence are complemented by a novel conceptualisation of underpricing. Contrarily to previous research, this study measures underpricing on the day of issuance and thereby from an ex-ante, rather than an ex-post perspective. Based on a sample of 947 bonds issued by 320 non-financial corporations, this thesis finds that bonds in the corporate investment grade space are subject to an average New Issue Premium of 7bps on the day of pricing. Deal-specific and market-related variables help to explain bond underpricing, supporting information-based theories of the phenomenon. Surprisingly, the ECB's quantitative easing appears to have only a marginal impact on the magnitude of underpricing and its determinants.