Secondary Market Liquidity and Primary Market Allocations in Corporate Bonds

49 Pages Posted: 19 Sep 2019 Last revised: 12 Aug 2020

See all articles by Thomas Flanagan

Thomas Flanagan

University of Michigan, Stephen M. Ross School of Business

Simi Kedia

Rutgers Business School

Xing (Alex) Zhou

Board of Governors of the Federal Reserve System

Date Written: September 1, 2019

Abstract

Using a regulatory version of TRACE data that include almost all primary and secondary market trades in corporate bonds over the period 2010-2017, we provide the first comprehensive study on the primary market for corporate bonds. Secondary market illiquidity can drive gains from primary market allocations to far exceed underpricing. Based on initial allocations identified from regulatory disclosures by insurance firms, we find that gains from initial allocations are greater for investors with trading relationships with the underwriter. Such favoritism toward investors with trading relationships increases with secondary market illiquidity.

Keywords: Corporate Bond Issuance, Primary Markets, Underpricing, Overall Benefit from Initial Allocations, Secondary Market Liquidity, Lead Underwriters

JEL Classification: G20, G22, G24, G28

Suggested Citation

Flanagan, Thomas and Kedia, Simi and Zhou, Xing (Alex), Secondary Market Liquidity and Primary Market Allocations in Corporate Bonds (September 1, 2019). Available at SSRN: https://ssrn.com/abstract=3449431 or http://dx.doi.org/10.2139/ssrn.3449431

Thomas Flanagan

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Simi Kedia

Rutgers Business School ( email )

117 Levin
94 Rockafellar Road
Piscataway, NJ
United States
8484454195 (Phone)

Xing (Alex) Zhou (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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