Secondary Market Liquidity and Primary Market Pricing of Corporate Bonds

Journal of Risk and Financial Management, 2019

22 Pages Posted: 4 Jun 2019

See all articles by Michael A. Goldstein

Michael A. Goldstein

Babson College - Finance Division

Edith S. Hotchkiss

Boston College - Carroll School of Management

David Pedersen

Rutgers School of Business-Camden

Date Written: May 13, 2019

Abstract

This paper studies the link between secondary market liquidity for a corporate bond and the bond’s yield spread at issuance. Using ex-ante measures of expected liquidity at the time of issuance, based on the characteristics of the underwriting syndicate, we find an economically large impact of liquidity on yield spreads. We estimate that a 10% increase in expected liquidity implies a decrease in the yield spread at issuance of between 8% and 14%. Our results suggest that liquidity has an important effect on firms’ cost of capital, and they contribute to the literature which examines the impact of liquidity on asset prices.

Keywords: corporate bonds, liquidity, primary market pricing

JEL Classification: G12

Suggested Citation

Goldstein, Michael A. and Hotchkiss, Edith S. and Pedersen, David, Secondary Market Liquidity and Primary Market Pricing of Corporate Bonds (May 13, 2019). Journal of Risk and Financial Management, 2019. Available at SSRN: https://ssrn.com/abstract=3387630

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)

David Pedersen

Rutgers School of Business-Camden ( email )

227 Penn Street
Camden, NJ 08102
United States

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