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

Author

Listed:
  • Baumann, Friedrich
  • Livdan, Dmitry
  • Kakhbod, Ali
  • Nazemi, Abdolreza
  • Schürhoff, Norman

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

  • Baumann, Friedrich & Livdan, Dmitry & Kakhbod, Ali & Nazemi, Abdolreza & Schürhoff, Norman, 2023. "Life after Default: Dealer Intermediation and Recovery in Defaulted Corporate Bonds," CEPR Discussion Papers 18482, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18482
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    More about this item

    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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