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

Friedrich Baumann, Dmitry Livdan, Ali Kakhbod, Abdolreza Nazemi and Schürhoff, Norman
Authors registered in the RePEc Author Service: Norman Schuerhoff

No 18482, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

JEL-codes: G12 G14 G24 (search for similar items in EconPapers)
Date: 2023-09
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Working Paper: Life after Default: Dealer Intermediation and Recovery in Defaulted Corporate Bonds (2023)
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