Liquidity and the Pricing of Corporate Bond Issues


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This paper studies the link between secondary market liquidity in corporate bonds and the bond’s yield spread at issuance. Using ex-ante measures of expected liquidity at the time of issuance, based on the composition of the underwriting syndicate, we find an economically large impact of liquidity on yield spreads. Based on our estimates, a one standard deviation increase in expected liquidity lowers an issuer’s yield spread by between 1.2% and 3.3%. Our results suggest that liquidity has an important effect on firms’ cost of capital and also contribute to the literature which examines the impact of liquidity on asset prices.


Finance and Financial Management

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