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Life after Default: Dealer Intermediation and Recovery in Defaulted Corporate Bonds

Author

Listed:
  • Friedrich Baumann

    (Karlsruhe Institute of Technology)

  • Ali Kakhbod

    (University of California, Berkeley)

  • Dmitry Livdan

    (University of California, Berkeley; CEPR)

  • Abdolreza Nazemi

    (Karlsruhe Institute of Technology)

  • Norman Schürhoff

    (University of Lausanne, Swiss Finance Institute and CEPR)

Abstract

We examine the trading and pricing of defaulted U.S. corporate bonds. Defaulted bonds are actively traded since the bonds’ natural holders change from buy-and-hold to specialized vulture investors. We document that intermediation after default shifts to dealers with prior expertise in the defaulted bond. These primary dealers locate higher-valuation counterparties in longer intermediation chains and absorb more order flow in their inventory than other dealers. The switch to trading with primary dealers raises recovery rates by 8%. Our results highlight the importance of dealers’ expertise in intermediating specific corporate bonds which stabilizes market functioning and lowers credit risk ex-ante.

Suggested Citation

  • Friedrich Baumann & Ali Kakhbod & Dmitry Livdan & Abdolreza Nazemi & Norman Schürhoff, 2023. "Life after Default: Dealer Intermediation and Recovery in Defaulted Corporate Bonds," Swiss Finance Institute Research Paper Series 23-85, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2385
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    More about this item

    Keywords

    corporate default; corporate bonds; recovery rates; over-the-counter markets; dealer networks;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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