Dealer Behavior and the Trading of Newly Issued Corporate Bonds

Abstract

This paper examines dealers' secondary market trading in newly issued corporate bonds to understand who gains from aftermarket sales to customers at higher prices. Retail investors largely purchase bonds from non-underwriters at increasing prices, while institutions buy from underwriters at higher prices initially but lower prices longer term. Non-underwriters derive market power from their ability to reach investors with weak trading connections to underwriters, while underwriters benefit from a short-lived information advantage obtained from the bookbuilding process. Overall, most gains from selling bonds at higher secondary market prices accrue to non-underwriters, and are unlikely to be recaptured by issuers.

Keywords: Corporate bonds, primary and secondary markets, underwriters, OTC markets, trading networks, dealers, bookbuilding

JEL Classification: G14, G22, G24, G28, G30