A Corporate Finance View of Debt Market Illiquidity

63 Pages Posted: 17 Jul 2023 Last revised: 6 Sep 2023

See all articles by Florian Nagler

Florian Nagler

Bocconi University; Centre for Economic Policy Research (CEPR); IGIER - Innocenzo Gasparini Institute for Economic Research

Giorgio Ottonello

Nova School of Business and Economics

Date Written: August 29, 2023

Abstract

We empirically study non-traded bonds (NTB). We find that NTB offerings are driven by a firm-demand channel: firms choose to issue NTB in expectation of future deleveraging needs. NTB offerings thus predict firms' future deleveraging activity, which happens through repurchasing NTB. We establish our findings within a stringent empirical setup where we exploit variation in repurchasing activity within firms while factoring out investor-demand shocks. Our analysis challenges the idea that illiquid assets are mainly a symptom of market frictions and shows that NTB are driven by corporate demand for financial flexibility. NTB arise as a cure to agency frictions because firms want to lock-in stable investor bases that ease repurchases. Our results have important implications for understanding illiquidity in debt markets.

Keywords: Non-traded asset, corporate bond, deleveraging, financial flexibility, agency frictions, repurchasing debt, debt market illiquidity

JEL Classification: G12, G32

Suggested Citation

Nagler, Florian and Ottonello, Giorgio, A Corporate Finance View of Debt Market Illiquidity (August 29, 2023). Available at SSRN: https://ssrn.com/abstract=4505445 or http://dx.doi.org/10.2139/ssrn.4505445

Florian Nagler (Contact Author)

Bocconi University ( email )

Via Roentgen 1
Milan, MI 20136
Italy

HOME PAGE: http://sites.google.com/site/floriannagler/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Milan, MI 20136
Italy

Giorgio Ottonello

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

HOME PAGE: http://https://sites.google.com/view/gi8nello

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