Assymetric information and the pricing of sovereign eurobonds: India 1990–1992

Assymetric information associated with issues of transparency, governance and the country's financial, economic and political organization make it difficult to price bonds issued by sovereign entities. Where asymmetric information and corporate debt are concerned, the literature suggests that factors such as ratings, listing exchange, issuer type, lead manager, number of dealers and influential dealer, provide help to mitigate the problem. In this paper we test whether any of these factors are relevant for Indian eurobond prices over the period 1990–1992. We find that they do not provide much help. After accounting for changes in the risk-free term structure none of these factors contributes to explaining secondary market Indian bond prices over the period. Although rating changes are significant, taken together with changes in the risk-free term structure, the adjusted R-squared is lower than when changes in the risk-free term structure are used alone. None of the other factors are close to being significant at any conventional level.