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Working papers

"Corporate Bond Market Segmentation"   (with Marco Rossi).
  • Invited for Revise and Resubmit at the Review of Asset Pricing Studies.
Abstract: The predominant explanation for arbitrage crashes is a lack of investor capital to exploit mispricing. This paper shows that slow-moving capital is only partially responsible for the past arbitrage crashes in the convertible bond market. Even when convertible bonds were severely underpriced, some investors continued to buy strictly dominated straight bonds from the same issuers. Our findings suggest that both market segmentation and slow-moving capital obstructed the recovery from the arbitrage crashes. Furthermore, exploiting the market segmentation with a long/short trading strategy provides positive abnormal returns after accounting for transaction costs.    "Personal Taxes and Corporate Cash Holdings"   (with Kristian Miltersen and Ramona Westermann). Abstract: Dividends are taxed at the personal level, but injecting funds into firms does not offer the symmetric tax benefit. Hence, there is a personal tax saving incentive to retain cash in the firm. We develop a corporate finance model of liquidity management, in which the firm’s liquidity policy trades off precaution and saved personal taxes against agency and corporate tax costs. The model implies that the tax saving motive is substantial and increasing with the dividend tax rate. Consistent with the model, we show empirically that, after the 2003 dividend tax cut, affected firms reduced their cash accumulation.    "Dealer Networks and the Cost of Immediacy"   (with Thomas K. Poulsen and Obaidur Rehman).
  • Scheduled for presentation at the 2022 AFA conference in Boston.
Abstract: We show that uninformed corporate bond index trackers pay lower transaction costs when they request immediacy from dealers with central network positions. This centrality discount supports recent network models in which core dealers have a comparative advantage in carrying inventory. We show that core dealers provide more immediacy and revert deviations from their desired inventory faster. When dealers trade with other dealers, we find a centrality premium consistent with core dealers exploiting their comparative advantage to extract more surplus when bargaining with peripheral dealers. We rule out alternative explanations based on adverse selection and customer clienteles.

Last updated by: Jens Dick-Nielsen 22/10/2021