Secondary Market Liquidity and Primary Market Allocations in Corporate Bonds

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