DEV/DOC(2007)1 Secondly, because one of the roles of underwriters is to participate in the secondary 33 market in order to stabilise the price and avoid volatility of the new issue . By giving favourable advice to investors regarding external debt issued, underwriters could send positive signals about that country and thus avoid a decrease in the price34. In order to study information structure in the IPO market and to analyse whether investment banks’ recommendations could depend on the underwriting business, it would be interesting to compare underwriters’ recommendations with recommendations given by other investment banks (namely non-underwriters recommendations, that is investment banks that failed to secure the bond issuance mandate) during the announcement date of the issue of a bond. As shown in Figure 2, on average (period 1999-2006), for all countries underwriters’ recommendations to Latin American countries are higher than or at least equal to nonunderwriters’ recommendations. Additionally, by taking the weighted average, underwriters’ recommendations are 25 per cent larger (0.3 vs. 0.2) with respect to those of Non-Lead managers. This is particularly the case for Colombia, Ecuador, Peru and Venezuela. Interestingly, in the case of Brazil, the biggest and most liquid market, such a bias is less marked, while in the case of Mexico it is the opposite.
33.
As it is noted on the prospectus of the bonds, although the underwriter is not obligated to make a secondary market for the bonds, it plans to make one: “Brazil (the issuer) has been advised by the underwriters that the underwriters intend to make a market in the global bonds but are not obligated to do so and may discontinue market making at any time without notice. No assurance can be given as to the liquidity of the trading market for the global bonds.” Prospectus supplement of $750,000,000. Federative Republic of Brazil. 10.5 per cent Global Bonds Due 2014. July 7, 2004.
34.
It would be interesting to analyse the impact of recommendations on the secondary market price of sovereign bonds, a pending research for emerging markets.
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