Fallen Angels and Price Pressure

Abstract

We examine price pressure in a setting where trades occur because of regulations and when information effects are absent. Our study of fallen angel bond sales by insurance companies shows that price pressure is negligible, if not non-existent. We attribute our results to the fact that the trades occur when fundamentals are unchanged and dealers know that the sales are not motivated by private information about future returns. Our results confirm the predictions of Admati and Pfleiderer (1991) and Roell (1990) that sellers will benefit from a higher price when dealers recognize that they are uninformed. We find that insurers do not attempt to hide their trades by selling bonds before they are downgraded, consistent with following a strategy of sunshine trading.

Keywords: price pressure, sunshine trading, informed trader, fallen angel bonds, insurance

JEL Classification: G10, G12