Risk Mitigation by Institutional Participants in the Secondary Market: Evidence from Foreign Rule 144A Debt Market

Abstract

We study secondary market trades of debt issues by foreign firms in the U.S. under SEC Rule 144A, a unique market where the counterparties are qualified institutional buyers (QIBs). We find that even though the secondary yield spreads of foreign 144A debt issues are larger than comparable public debt issues by foreign and domestic firms in the U.S., the incremental impact of common risks – namely, credit, illiquidity, governance, and familiarity risks – on spreads are lower for foreign 144A issues compared to various control samples. Our finding is consistent with the notion that institutional participants, namely QIBs, play a specialized role in mitigating risk exposures in the foreign 144A secondary market.

Keywords: foreign debt markets, 144A bonds, secondary bond market spreads, QIBs, risk exposure

JEL Classification: G10, G14, G15, G30