Refinancing Risk, Liquidity and the Underpricing of Newly Issued Bonds

This study examines the effect of refinancing risk and liquidity of bond offering firms on the underpricing of their seasoned corporate issues. Using a sample of 8697 U.S. seasoned corporate bond offerings during 2002–2023, we find that refinancing risk increases the initial returns of corporate bond offerings, while liquidity preceding the bond offering date decreases the underpricing of corporate bonds. The underpricing of bond issues from illiquid issuers is most pronounced for firms with higher refinancing risk, highlighting the importance of secondary market bond liquidity in decreasing the cost of debt capital for constrained firms.