The Pricing of New Corporate Debt Issues

Abstract

Using computational linguistics, we examine whether risk factor disclosure in the offering prospectus provides unique information in the pricing of initial public offerings of bonds. Both credit ratings and initial yields are related to risks that discuss the financial condition of the firm, its indebtedness, covenants, and repayment. Aftermarket yields are more sensitive to risk when traded in the Rule 144A private market than in the publicly-traded market. However, the effect of disclosure on bond outcomes is similar for both public and private firms in either market. Thus, mandated disclosure provides valuable information to both public and private market participants.