Convertible Bond Underpricing. Liquidity explanation

This study is aimed at increase the understanding of convertible bonds underpricing, their relation to the liquidity factors and constructing a significant identifier of the liquidity for convertible bonds. It will also attempt to unify regular and Rule 144A convertible bonds with liquidity factors. The main findings of the paper are the following: the underlying stock’s bid-ask spread has a negative relation to the future underpricing of the convertible bond, but only for rule 144A bonds. This is consistent with findings of Henderson and Tookes (2012) and their search friction theory. Regular and Rule 144A convertible bonds do not share common liquidity factors. Alternatively, bond turnover ratio data suggests that liquidity has the same negative effect on both 144A and regular convertible bonds underpricings, however these results are not reliable.