Life after default: How dealer intermediation improves default recovery

76 Pages Posted: 22 Sep 2023

See all articles by Friedrich Baumann

Friedrich Baumann

Karlsruhe Institute of Technology

Ali Kakhbod

University of California, Berkeley

Dmitry Livdan

University of California, Berkeley

Abdolreza Nazemi

Karlsruhe Institute of Technology

Norman Schuerhoff

Swiss Finance Institute - HEC Lausanne

Date Written: September 22, 2023

Abstract

Using hand-collected data on defaults of U.S. corporate bonds, we document the importance of dealers in the recovery process. After a bond defaults, trading intensifies and becomes concentrated among the bond’s primary pre-default dealer. This intermediation leads to a 4-7% improvement in the bond’s recovery value relative to par. Consistent with improved beliefs about recovery, driven by the primary dealer’s reallocation of defaulted bonds to specialized distressed-bond investors creating a positive feedback loop, prices in earlier transactions influence subsequent ones. Our findings highlight how dealer intermediation can stabilize distressed-bond markets and mitigate credit risk for bondholders.

Keywords: corporate default, corporate bonds, recovery rates, over-the-counter markets

JEL Classification: G12, G14, G24

Suggested Citation

Baumann, Friedrich and Kakhbod, Ali and Livdan, Dmitry and Nazemi, Abdolreza and Schuerhoff, Norman,
Life after default: How dealer intermediation improves default recovery
(September 22, 2023). Swiss Finance Institute Research Paper No. 23-85, Available at SSRN: https://ssrn.com/abstract=4579966 or http://dx.doi.org/10.2139/ssrn.4579966

Friedrich Baumann

Karlsruhe Institute of Technology ( email )

Germany

Ali Kakhbod

University of California, Berkeley ( email )

Haas School of Business
2220 Piedmont Ave
Berkeley, CA 94720
United States

Dmitry Livdan

University of California, Berkeley ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
(510) 642-4733 (Phone)

Abdolreza Nazemi

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

Norman Schuerhoff (Contact Author)

Swiss Finance Institute - HEC Lausanne ( email )

Chavannes-près-Renens
Switzerland

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