Conditional Conservatism and Underpricing in US Corporate Bond Market

Building upon recent research suggesting that debt markets rather than equity markets shape financial reporting, this study examines the relationship between conditional conservatism (used as a proxy for information risk) and the underpricing of newly issued corporate bonds. There are two contrasting arguments for bond underpricing: the information argument predicts that bond issuers with less information risk will experience less underpricing, while the signaling argument indicates that bond issuers with less information risk will underprice more to distinguish them from issuers with more information risk. Empirical results indicate that the signaling argument seems to better capture the dynamics of the public debt markets, with conditional conservatism being associated with greater underpricing of newly issued corporate bonds.