with Giorgio Ottonello
Abstract:
We empirically study non-traded bonds (NTB). We find that NTB offerings are driven by a firm-demand channel: firms choose to issue NTB in expectation of future deleveraging needs. NTB offerings thus predict firms' future deleveraging activity, which happens through repurchasing NTB. We establish our findings within a stringent empirical setup where we exploit variation in repurchasing activity within firms while factoring out investor-demand shocks. Our analysis challenges the idea that illiquid assets are mainly a symptom of market frictions and shows that NTB are driven by corporate demand for financial flexibility. NTB arise as a cure to agency frictions because firms want to lock-in stable investor bases that ease repurchases. Our results have important implications for understanding illiquidity in debt markets.