Dealer Behavior and the Trading of Newly Issued Corporate Bonds

62 Pages Posted: 19 Oct 2007 Last revised: 11 Jun 2021

See all articles by Michael A. Goldstein

Michael A. Goldstein

Babson College - Finance Division

Edith S. Hotchkiss

Boston College - Carroll School of Management

Stanislava (Stas) Nikolova

University of Nebraska - Lincoln

Date Written: June 21, 2021

Abstract

This paper examines dealers' secondary market trading in newly issued corporate bonds to understand who gains from aftermarket sales to customers at higher prices. Retail investors largely purchase bonds from non-underwriters at increasing prices, while institutions buy from underwriters at higher prices initially but lower prices longer term. Non-underwriters derive market power from their ability to reach investors with weak trading connections to underwriters, while underwriters benefit from a short-lived information advantage obtained from the bookbuilding process. Overall, most gains from selling bonds at higher secondary market prices accrue to non-underwriters, and are unlikely to be recaptured by issuers.

Keywords: Corporate bonds, primary and secondary markets, underwriters, OTC markets, trading networks, dealers, bookbuilding

JEL Classification: G14, G22, G24, G28, G30

Suggested Citation

Goldstein, Michael A. and Hotchkiss, Edith S. and Nikolova, Stanislava (Stas), Dealer Behavior and the Trading of Newly Issued Corporate Bonds (June 21, 2021). Available at SSRN: https://ssrn.com/abstract=1022356 or http://dx.doi.org/10.2139/ssrn.1022356

Michael A. Goldstein

Babson College - Finance Division ( email )

320 Tomasso Hall
Babson Park, MA 02457-0310
United States
781-239-4402 (Phone)
781-239-5004 (Fax)

HOME PAGE: http://faculty.babson.edu/goldstein/

Edith S. Hotchkiss (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Department of Finance Fulton Hall, Room 330
Chestnut Hill, MA 02467
United States
617-552-3240 (Phone)
617-552-0431 (Fax)

Stanislava (Stas) Nikolova

University of Nebraska - Lincoln ( email )

Lincoln, NE 68588-0490
United States
402-472-6049 (Phone)

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