Asymmetric Information and Receiving Investor Outcomes in the Block Market for Corporate Bonds
We examine two decades of block trading in corporate bonds to test theoretical predictions on receiving investors to whom the dealer distributes the block. Receiving investors lose on average from participating as a counterparty in the block trade. Nevertheless, participation is often optimal, even when asymmetric information is elevated (e.g., the block initiator is informed or in opaque markets), as receiver losses are smaller than initiating a similar-size trade. Across various settings that reduce asymmetric information, we show a substantial transfer in profits from the dealer to receiving investors. We exploit variations in trade reporting rules of maximum stipulated delay, showing that receiving investors obtain better terms on offsetting trades that occur after disclosure of the block trade. Our study adds nuance to existing evidence that customers benefit from transparency and helps explain the appeal of the block market for receiving investors.
Corporate bonds, block market, transaction costs, transparency, delayed reporting