Liquidity and price pressure in the corporate bond market: evidence from mega-bonds |
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| Affiliation: | 1. University of California-Riverside and Australian National University. 900 University Ave., Riverside, CA 92521;2. College of Business, University of Nebraska-Lincoln, 730 N 14th Street, Lincoln, NE 68588;1. Bank of Canada, 234 Wellington St, Ottawa, ON K1A 0G9, Canada;2. Centre for Economic Policy Research, London, United Kingdom;1. Department of Finance, University of Illinois Urbana-Champaign, United States;2. Department of Finance, Erasmus University Rotterdam, Netherlands;1. Banco de Portugal, Economics and Research Department, Av, Almirante Reis 71, 1150-015 Lisbon, Portugal;1. Federal Reserve Board, Division of Monetary Affairs, Board of Governors of the Federal Reserve System, USA;2. Robert Day School of Economics and Finance, Claremont McKenna College, USA;1. Finance area, INSEAD, 1 Ayer Rajah Avenue, Singapore 138676;2. University of Vienna, Oskar-Morgenstern-Platz 1, Wien 1090, Austria;1. Yale School of Management and NBER;2. AQR Capital |
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| Abstract: | Larger bonds offer greater liquidity, which should reduce their yields. A simple way for firms to reduce financing costs is to sell bonds with large face values. We find that mega-bonds are more liquid than smaller bonds. However, offering yield spreads on mega-bonds are not lower and are higher than spreads of bonds issued by similar companies. The discount applied to large new issues is consistent with price pressure effects that are also present in the secondary market prices of the issuing firm's existing bonds. Our results suggest a hidden cost to issuing very liquid bonds. |
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