Underpricing of Private Bonds Under Rule 144A*

Abstract I examine the underpricing of private bonds from U.S. issuers under Rule 144A and its relation to information asymmetry. The evidence shows that informationally opaque issuers prefer private placements, offering higher initial returns to attract informed investors and avoiding the elevated default premium they would face in public markets. On average, private bonds deliver 0.54% higher initial excess returns than public bonds. While underpricing is positively related to information asymmetry for public bonds, the relationship is weak for private bonds, as informed investors are less sensitive to dispersed market information. The underpricing of private bonds is stronger for an issuer's first private offering, but the higher returns do not persist beyond the first trading day. Overall, private bond issuance reflects firm incentives to target informed institutional investors in the bond market.