with Peter Feldhütter and Jiri Woschitz
We introduce Benchmark Trading Intensity (BTI), a transaction-based measure to identify the corporate bonds that absorb benchmark demand. The measure exploits trading activity around benchmark pricing windows. Using an unexpected increase in the minimum bond size required for inclusion in the Bloomberg U.S. Corporate Bond Index, we find that excluded bonds experience a permanent yield increase of about 8 basis points upon announcement and a further temporary 4-5 basis points increase around implementation. These effects are concentrated among high-BTI bonds, which also experience larger declines in passive ownership following implementation. The larger announcement effect suggests that studies based on predictable benchmark events may substantially understate the full price effects of benchmark demand.
with Jens Dick-Nielsen and Obaidur Rehman
We examine how interdealer networks affect transaction costs through inventory management. Using bond index exclusions, we study immediacy-driven, information-insensitive trades and exploit sharp variation in dealer inventory imbalances around exclusions. In this setting, which isolates inventory management from adverse selection and customer heterogeneity, transaction costs decrease with network centrality in customer trades (centrality discount) but increase in interdealer trades (centrality premium). Core dealers absorb larger inventory imbalances, unwind them faster, and intermediate trades more directly than peripheral dealers. Overall, the evidence supports inventory-based network models and identifies inventory management as an important channel through which interdealer networks affect transaction costs.
The investment premium - the finding that firms with low asset growth deliver high average returns - is an integral part of recent factor models. I document empirically that the investment premium (1) reflects leverage, (2) does not exist among zero-leverage firms, and (3) increases with firms' refinancing intensities. This new evidence challenges prominent explanations of the investment premium including the q-theory of investment and behavioral finance. To explain the evidence, I develop a model in which firms make both optimal investment and financing decisions. The model shows that the investment premium reflects both leverage and refinancing intensities consistent with my empirical findings.
with Peter Feldhütter
We document cross-sectional variation in bid-ask spreads in the U.S. corporate bond market and use the variation to test OTC theories of the bid-ask spread. Bid-ask spreads, measured by realized transaction costs, increase with maturity for investment grade but not for speculative grade bonds. For short-maturity bonds, spreads increase with credit risk while long-maturity bonds rated AAA/AA+ have significantly higher spreads than other investment grade bonds. We find that dealer inventory is the most important determinant of the variation in bid-ask spreads. How bond sales travel through the network of dealers also explains part of the variation, particularly for speculative grade bonds. In contrast, search-and-bargaining frictions and asymmetric information have limited explanatory power.
work in progress
I study predictions of rollover risk models and strategic debt service models on the negative relationship between corporate bond yield spreads and debt dispersion. Rollover risk models predict a more negative relationship for financially constrained firms, whereas strategic debt service models predict a less negative relationship. To test these predictions I run panel regressions of yield spreads on debt dispersion interacted with measures of financial constraints. I find that the relationship between yield spreads and debt dispersion is more negative for financially constrained firms consistent with rollover risk models.