Mispricing in the Japanese corporate bond market

C. R. McKenzie, Sumiko Takaoka

Research output: Chapter in Book/Report/Conference proceedingConference contribution

Abstract

The purpose of this paper is to determine whether there is any mispricing of publicly issued straight corporate bonds in Japan, and to determine what factors explain variations in the degree of mispricing. While there is an extremely large literature devoted to investigating the extent of mispricing of initial public offerings (IPOs) of equity in both the United States, and Japan, there appear to be very few studies examining the extent of mispricing of IPOs of straight corporate bonds in the United States and Japan. The key study for the United States is Datta et al. (1997) who find that IPOs of speculative grade ("junk") bonds are underpriced, but those rated investment grade are overpriced. Two later studies for the United States report underpricing rather than overpricing (see Helwege and Kleiman (1998) and Cai et al. (2007)). For Japan, Matsui (2000, 2006) finds that IPO and seasoned issues when analyzed together exhibit significant overpricing too. In this paper, using data on initial (IPO) and seasoned issues of publicly issued straight bonds over the ten year period between March 1992 and March 2002, evidence is presented that suggests the existence of significant mispricing, in particular, overpricing, of these bonds. This overpricing has several features: it does not appear decline overtime; on average, it increases as the rating of the bond issued falls, it is smaller for IPO issues; and it is influenced by the degree of competition among lead underwriters. Compared to Matsui's (2000, 2006) analysis of 599 issues of straight bonds made between March 1995 and March 2000, the analysis in this paper makes several improvements: it covers a wider time period giving a far large sample size (between 1726 and 2247 issues depending on the analysis), and even when limited to the same period as Matsui (2000, 2006) the number of bonds covered is 1490; our data source provides price data on the first day that the bond is transacted in the secondary market rather than data on one day in the first week after the bond is transacted in the secondary market; we follow standard procedures for using matched government bonds of the same maturity as the corporate bond issued; and we take account of possible differences between IPO and seasoned issues.

Original languageEnglish
Title of host publication18th World IMACS Congress and MODSIM09 International Congress on Modelling and Simulation
Subtitle of host publicationInterfacing Modelling and Simulation with Mathematical and Computational Sciences, Proceedings
Pages1545-1551
Number of pages7
Publication statusPublished - 2009 Dec 1
Event18th World IMACS Congress and International Congress on Modelling and Simulation: Interfacing Modelling and Simulation with Mathematical and Computational Sciences, MODSIM09 - Cairns, QLD, Australia
Duration: 2009 Jul 132009 Jul 17

Publication series

Name18th World IMACS Congress and MODSIM09 International Congress on Modelling and Simulation: Interfacing Modelling and Simulation with Mathematical and Computational Sciences, Proceedings

Other

Other18th World IMACS Congress and International Congress on Modelling and Simulation: Interfacing Modelling and Simulation with Mathematical and Computational Sciences, MODSIM09
CountryAustralia
CityCairns, QLD
Period09/7/1309/7/17

Keywords

  • Bond pricing
  • Competition
  • IPOs
  • Mispricing
  • Overpricing
  • Underpricing
  • Underwriting

ASJC Scopus subject areas

  • Computational Theory and Mathematics
  • Computational Mathematics
  • Modelling and Simulation

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  • Cite this

    McKenzie, C. R., & Takaoka, S. (2009). Mispricing in the Japanese corporate bond market. In 18th World IMACS Congress and MODSIM09 International Congress on Modelling and Simulation: Interfacing Modelling and Simulation with Mathematical and Computational Sciences, Proceedings (pp. 1545-1551). (18th World IMACS Congress and MODSIM09 International Congress on Modelling and Simulation: Interfacing Modelling and Simulation with Mathematical and Computational Sciences, Proceedings).