How a New Bond Issuance Affects the Liquidity of a Bond Portfolio

Abstract

Previous research describing corporate bond liquidity tends to focus on the effects on liquidity of factors such as bond age, bond credit risk, size of issuance, and regulation of trading. The article notes that many firms issue bonds when previous bonds are still outstanding and also examines how the new bond issuance affects the liquidity of the preexisting corporate bonds. One might expect the liquidity of the preexisting bonds to improve because of the greater quantity of very similar bonds outstanding or the increase in public information about the firm. However, investment bankers may aggressively market the new issuance, which may diminish the liquidity of the preexisting bonds. The article concludes that the former effect dominates and that the improvement in liquidity is more significant when newly issued bonds offer a longer maturity than preexisting bonds. Key Findings ▪ The liquidity of preexisting bonds tends to increase when a new bond issuance by the firm becomes available. ▪ The increase in liquidity as a result of a new bond issuance tends to be stronger when its maturity is longer relative to that of preexisting bonds. ▪ When the liquidity of preexisting bonds increases in response to a new issuance, the effect is temporary and diminishes over time.