Life after default: How dealer intermediation improves default recovery
76 Pages Posted: 22 Sep 2023
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: 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
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