What is the role of bookbuilding in bond allocation? Evidence from Brazil
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This study examines two different aspects of bookbuilding process of issuing corporate bond on an emerging market. Specifically: (a) underwriter’s discretionary power and (b) bidder’s efficiency. Using a unique sample of 40 bookbuilding processes for Brazilian corporate bonds of non-financial companies between January 2001 and July 2006, we document that there is no empirical evidence that the underwriter uses his discretionary power, as other studies of equity offerings have confirmed. In this work, the difference between pro rata allocation and actual allocation (award receive by bidder) is calculated for each bid. The difference is null for 96.6% of the sample, only 19 of 557 bids have difference between these two manners. From these 19 bids, only 4 bids present absolute difference (pro rata minus actual allocation) larger than 1 corporate bond. Bidder and issuer’s characteristics seem to impact investors’ efficiency on competitive auctions. For instance, we find empirical evidence that step bids reduce bidder’s likelihood of success, contrary to early studies that argue that multiple bids are optimal. Mutual funds present superior performance on bidding strategy among bidders. If the bidder were a mutual fund, its chance of success would increase 60%. This advantage is related to particular features of the Brazilian corporate bond market that allowed mutual fund to develop an expertise on the bookbuilding process. They are responsible for around 75% of demand for corporate bonds and participate frequently in bookbuilding processes. Furthermore, the total number of bidders that participate in bookbuilding process is small and all of them are domestic. Besides, there is no restriction to international investors.