Who watches the Auctioneer? Supervising primary bond markets to reduce agency costs

Abstract

We study the mandated introduction of an auction (and its subsequent supervision) for the pri-mary bond market in China. These regulatory interventions significantly reduce the cost of debt for Chinese issuers. While this reduction is partly driven by reduced information asymmetry, we show the majority of the benefits flow from reduced agency conflict between underwriters and issuers. Using unique bidder-level data from a lead underwriter, we develop replicable tools and techniques to identify collusive bidding behavior that results in artificial (and economically costly) increases in bond yields. Such evidence can benefit global regulators, issuers and investors currently using unsupervised auction mechanisms.