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Journal of Banking & Finance 36 (2012) 21102121

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Journal of Banking & Finance


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Multimarket trading and corporate bond liquidity


Lubomir Petrasek
Smeal College of Business, Pennsylvania State University, University Park, PA 16802, USA

a r t i c l e

i n f o

Article history:
Received 8 September 2011
Accepted 15 March 2012
Available online 23 March 2012
JEL classication:
G15
G12
F36

a b s t r a c t
Global bonds are international securities traded and settled efciently in multiple markets. This paper
examines global bonds to evaluate the effects of multimarket trading on corporate bond liquidity and
pricing. The results show that global bonds are signicantly more liquid than similar-sized domestic
bonds of the same issuers, and their liquidity advantage is reected in higher market valuations. These
ndings support microstructure models that predict a positive relation between the number of potential
investors and liquidity in over-the-counter markets, and help explain the increasing use of global bonds
by corporate issuers.
2012 Elsevier B.V. All rights reserved.

Keywords:
Corporate bonds
Liquidity
International nancial markets

1. Introduction
Rather than issuing bonds in domestic markets, many of the
worlds largest corporations have recently started to issue global
bonds. Global bonds are offered simultaneously to investors in
the two major markets for dollar-denominated debt, namely the
US bond market and the overseas market known as the Eurobond
market. Unlike domestic bonds, global bonds are designed for multimarket trading. These bonds include features that facilitate their
trading, clearing, and settlement in the US bond market, the Eurobond market, as well as between markets. Global bonds have become the debt instrument of choice for large corporate issuers in
recent years, and corporate global bond issuance accounted for
more than 80% of the total US-dollar denominated corporate bond
issuance in 2009 (see Fig. 1).
Despite the increasing importance of global bonds, the effects of
multimarket trading on corporate bond liquidity and pricing are
not well understood. Miller and Puthenpurackal (2005) study global bond offerings from the issuers perspective, and nd that rms
can lower their cost of debt by issuing global rather than domestic
bonds. However, the benets of global bonds from the investors
perspective have not been previously documented. Not much is
known about the trading, liquidity, and pricing of global bonds in
secondary markets, and the effects of their multimarket trading
on liquidity. The present paper provides new evidence from secondary markets on the effects of multimarket trading on corporate

bond liquidity and pricing. It examines global bond liquidity and


transaction prices in secondary markets, and compares them with
the liquidity and prices of bonds issued by the same corporations
in the US domestic market.
Global bonds have key similarities when compared with US
domestic bonds. They are registered with the SEC, have similar
indentures to US bonds, and pay interest semiannually. The distinctive property of global bonds is their multimarket trading. They
are designed to trade simultaneously in the US bond market and
the Eurobond market, and have features that minimize cross-market transaction costs. Multimarket trading could be a source of value to bondholders because it improves corporate bond liquidity.
Specically, by virtue of trading in several markets, global bonds
have the potential to reach a wider international investor base
and have a greater number of dealers. Therefore, global bonds become more liquid than similar domestic bonds. Since prior research shows that liquidity has a large positive effect on
corporate bond prices,1 multimarket trading could affect corporate
bond valuations.
This paper examines the effects of multimarket trading on
corporate bond liquidity and pricing using a sample of 930 global
and domestic bonds. To explore these effects, I compare secondary
market yields of global and domestic bonds issued by the same
obligor. Transactions prices in secondary markets for both US and
global bonds are obtained from TRACE.2 Next, I supplement the

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E-mail address: lzp114@psu.edu
0378-4266/$ - see front matter 2012 Elsevier B.V. All rights reserved.
http://dx.doi.org/10.1016/j.jbankn.2012.03.015

See, e.g. Longstaff et al. (2005), Chen et al. (2007), and Bao et al. (2011).
TRACE is the Trade Reporting and Compliance Engine, sponsored by the US
Financial Industry Regulatory Authority (FINRA).
2

L. Petrasek / Journal of Banking & Finance 36 (2012) 21102121

Percentage of debt issued

100%
80%
60%
40%
20%
0%
98

99

00

01

02 03 04 05
Year of issuance

Global bonds

06

07

08

09

U.S. domestic bonds

Fig. 1. Corporate issuance of global and US bonds (% of debt issued). The gure plots
the proportions of global and domestic issuance of US dollar-denominated
corporate debt from 1998 to 2009. Global bonds are designed for trading in the
US bond market and in the international market known as the Eurobond market,
whereas US bonds are designed for trading only in the US domestic bond market.
The gure includes all public issues of straight corporate debt denominated in US
dollars and registered in the US The source of the data is SDC.

TRACE data with information on trading activity in the Eurobond


market from TRAX,3 compute multiple trade-based measures of
corporate bond liquidity, and test whether global bonds are more liquid than comparable domestic bonds. Finally, I examine whether
liquidity can explain the yield spreads between global and domestic
bonds.
The methodology also represents an improvement over previous studies of corporate bonds. Global bonds are typically issued
by large corporations that have multiple debt issues outstanding
in the domestic market as well as the global market. This allows
me to examine a matched sample of global and domestic bonds issued by the same companies, and fully control for the issuer credit
risk when analyzing corporate bond liquidity and prices.
The results support the hypothesis that multimarket trading
improves corporate bond liquidity. Compared to the outstanding
domestic bonds of the same issuers, global bonds are signicantly
more liquid. Even after controlling for well-known determinants of
corporate bond liquidity, such as bond age and issue size, global
bonds exhibit greater trading volumes in the US bond market
and in the Eurobond market, trade more frequently, and their
prices are less volatile and less strongly affected by large trades.
Several measures of transaction costs, including the measure of
price impact proposed by Amihud (2002), and the measure of price
reversals suggested by Roll (1984) and Bao et al. (2011), are significantly smaller for global bonds than for domestic bonds. Furthermore, the liquidity advantage of global bonds is priced. When two
bonds of the same issuer, one global and one domestic, trade on the
same day, the yield on the global bond is on average about 20 basis
points lower. The yield spread between global and domestic bonds
is greater for speculative grade bonds than for investment grade
bonds, and it increases during liquidity crises. Finally, I nd that
the trade-based liquidity measures can explain a large part of the
yield difference between global and domestic bonds, and up to
16% of the cross-sectional variation in yield spreads between different bonds of the same company.
Overall, the empirical ndings in this paper show a strong relation between multimarket trading and corporate bond liquidity.
Bonds that can be traded and settled efciently in multiple markets
exhibit a signicant liquidity advantage over domestic bonds issued by the same rms. These ndings are consistent with micro3
TRAX is the trade matching and regulatory system for the Eurobond market,
sponsored by the International Capital Markets Association (ICMA).

2111

structure models that predict a positive relation between the number of potential investors and liquidity in over-the-counter markets (e.g. Dufe et al., 2005, 2007). Furthermore, the liquidity
advantage of global bonds is priced, and can explain the tendency
of large corporations to issue global rather than domestic bonds.
The remainder of the paper is organized as follows. Section 2
provides a brief description global bonds and their multimarket
trading. Section 3 develops testable hypothesis about the relation
between multimarket trading and corporate bond liquidity. Section 4 describes the data. Section 5 shows the empirical results,
including the analysis of transaction prices and liquidity. Section
6 provides concluding remarks.

2. Global bonds and multimarket trading


The market for publicly traded US dollar-denominated corporate bonds has traditionally been divided between two nancial
centers: the US bond market and the Eurobond market. Trading
in both markets takes place primarily over-the-counter between
bond dealers and institutional investors. However, several legal
and institutional differences between the two markets prevent
their full integration.
Most of the trading activity in the US corporate bond market involves a relatively small number of dealers (Schultz, 2001). All US
bond dealers are required to be members of FINRA,4 and must report trades to the Trade Reporting and Compliance Engine (TRACE)
sponsored by FINRA. Trading is concentrated in New York trading
hours. Trades are settled through the Depository Trust Company
(DTC). In general, the bonds traded in this market must be registered
with the Securities and Exchange Commission (SEC) under the Securities Act of 1933. The bonds are also in registered form, meaning
that bondholders names are entered in a register kept by the issuer.
US domestic bonds are structured to meet US regulatory requirements and appeal primarily to US investors.
The Eurobond market is an international bond market for medium and long-term debt. Most Eurobond dealers are members of
ICMA,5 a self-regulatory organization for the Eurobond market. Trading is concentrated in London trading hours. Trades are settled
through Clearstream or Euroclear. In contrast to US bonds, Eurobonds
are not registered with the SEC or other national regulatory authorities. In addition, Eurobonds are anonymous bearer securities. However, US tax law penalizes the holders of bearer securities such as
Eurobonds,6 which makes them unattractive to US investors. To satisfy US regulatory requirements, Eurobonds are not offered to US
investors in the primary market, and they are locked up for 40 days
after issuance to be sold exclusively to non-US investors (see, e.g.
Wood, 2008). Therefore, Eurobonds are rarely held by US investors,
who prefer global bonds to gain exposure to the Eurobond market.
Global bonds are designed for trading in both the US and Eurobond markets. The rst global bonds were issued by the World
Bank in 1989. The World Bank observed yield disparities on its dollar-denominated debt outstanding in the Eurobond market and in
the US market, and issued the rst global bonds to take advantage
of these disparities. By virtue of trading in both markets, global
bonds were expected to overcome market segmentation and become more liquid (Kapur et al., 1997).
Global bonds share many characteristics with US domestic
bonds, such as being registered with the SEC and paying semi-annual coupon. Their tax treatment is also similar to US domestic
4
FINRA is the US Financial Industry Regulatory Authority, formerly the National
Association of Securities Dealers (NASD).
5
ICMA is the International Capital Market Association, formerly the Association of
International Bond Dealers (AIBD).
6
The Tax Equity and Fiscal Responsibility Act of 1982 imposes tax sanctions on
both the issuers and the holders of anonymous bearer instruments.

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L. Petrasek / Journal of Banking & Finance 36 (2012) 21102121

bonds and neither US nor foreign investors can gain a tax advantage by investing in global bonds.7 However, global bonds are sold
to investors in multiple markets and their features allow both US and
Eurobond investors to trade these bonds as if they were local securities. Global bonds are structured to clear through several clearing
systems, including DTC and Clearstream or (and) Euroclear. Consequently, US investors settle global bond transactions through DTC
as they would settle domestic bond transactions, and overseas investors settle global bond transactions through Clearstream or Euroclear
as they would settle Eurobond transactions. Cross-market trades in
global bonds are efciently settled between the depositories. Thus,
non-US investors are more likely to trade global bonds than US
domestic bonds, and global bonds have a larger investor base.
Although the rst global bonds were issued by the World Bank,
global bonds have recently become the debt instrument of choice
for many large corporate issuers. Fig. 1 compares the proportions
of global and domestic issuance of US dollar-denominated corporate bonds from 1998 to 2009. Included are all public issues of
straight corporate debt denominated in US dollars and registered
for public trading in the US. The gure reveals a large increase in
the issuance of global bonds compared to US domestic bonds over
time. Whereas global bonds accounted for less than 10% of the total
proceeds from publicly traded, US-dollar denominated corporate
bond issuance in 1998, they accounted for more than 80% in 2009.
3. Multimarket trading and liquidity
The most important channel through which multimarket trading can increase corporate bond value is liquidity. Global bonds
could be more liquid because they have a greater number of dealers and a wider investor base. For one thing, both the dealers in the
US market and the dealers in the Eurobond market stand ready to
buy and sell global bonds. The microstructure models of Demsetz
(1968) and Ho and Stoll (1983), among others, predict a positive
relation between the number of dealers making the market in a given security and its liquidity. A greater number of dealers leads to
more competitive dealer markets (Demsetz, 1968), and facilitates
inventory risk management through inter-dealer trading (Ho and
Stoll, 1983; Reiss and Werner, 1998). Lower inventory risk and
more intense competition among market makers, in turn, reduce
transaction costs.
Liquidity may also be greater for bonds with a wider investor
base. Since global bonds can be marketed to investors in both the
US market and the Eurobond market, their pool of potential investors is larger. Dufe et al. (2005, 2007) develop a model in which
transactions costs and liquidity in over-the-counter markets, such
as the corporate bond market, depend on the number of potential
investors. Their model predicts that illiquidity discounts are smaller if investors have access to multiple market makers, and the
number of qualied investors is larger. Thus, global bonds that
have an international investor base and a large network of dealers
should be more liquid than domestic issues.
In addition, global bonds are often placed with investors in multiple markets, allowing them to have a greater issue size. However,
prior research on the relation between bond issue size and its
liquidity is inconclusive. On the one hand, Longstaff et al. (2005),
Edwards et al. (2007), and Mahanti et al. (2008) nd a positive relation between issue size and liquidity. On the other hand, Crabbe
and Turner (1995) contend that large and small bonds issued by
the same borrowers are close substitutes. Chen et al. (2007) nd
little evidence of the importance of the outstanding principal
7
Global and domestic bonds held by US residents are taxed equally. Foreign
investors in either global or domestic bonds issued after 1984 are exempt from the US
withholding tax (see IRS Publication 515 (2011), Withholding of Tax on Nonresident
Aliens and Foreign Entities).

amount in explaining corporate bond liquidity. I contribute to this


debate and distinguish between the effects of issue size and multimarket trading in the analysis of global bond liquidity and pricing.
Several recent papers nd a positive relation between corporate
bond prices and their liquidity (e.g. Longstaff et al., 2005; Chen et
al., 2007; Bao et al., 2011). For instance, Bao et al. (2011) argue that
illiquidity is as least as important in explaining cross-sectional differences in corporate bond yield spreads as credit risk. In times of
crisis, the contribution of illiquidity to yield spreads can overshadow credit risk. These ndings imply that global bonds may
command a liquidity premium relative to domestic bonds, in particular during liquidity crises.
4. Data
The data for this study come from several sources. The SDC
database provides information on new issues, including bond type,
issue size, and domestic and foreign issuance proceeds. I obtain
information on all corporate bond issues that are offered by public
corporations, denominated in US dollars, and publicly traded in the
US bond market, the Eurobond market, or both markets (global
bonds). In addition, I keep only bonds that are straight, senior,
non-convertible, non-asset backed, and without credit enhancements. Sample bonds are issued between January 1998 and
December 2008, and have a maturity of 5 years or more at the time
of issuance. Short-term notes are excluded because they are not
comparable with longer-term bonds.
Table 1 compares the sample of 219 global bond issuers with
523 rms that issue bonds only in the US domestic market during
the sample period 19982009. Global bond issuers have, on average, total assets that are four times larger than those of domestic
issuers ($128 billion vs. $30 billion). The average market capitalization of global bond issuers is also four times greater ($41 billion vs.
$10 billion), and global bond issuers have lower leverage and lower
book-to-market ratios. These characteristics suggest that the credit
risk and liquidity of bonds of global and domestic issuers are not
comparable. Therefore, I conne the analysis to bonds of global
issuers. Global bond issuers tend to be well-known corporations
with multinational operations and a global reputation. Appendix
A provides the names of the 45 most important issuers of global
bonds. The list is comprised of large nancial rms such as Morgan
Stanley, utilities such as Dominion Resources Inc., and global
industrial companies such as Ford Motor Company or Caterpillar

Table 1
Characteristics of global and domestic bond issuers. The table compares the
characteristics of 219 global bond issuers with the characteristics of 523 rms that
issue bonds only in the US domestic market. Presented are the averages across global
and domestic issuers, and the differences between the characteristics of global and
domestic issuers. The data are obtained from COMPUSTAT. Total assets and market
capitalization are measured at the end of each scal year. Leverage is measured as
short-term and long-term debt divided by end-of-year total assets. Book-to-market is
calculated as the book value of equity divided by market capitalization at the end of
each scal year. Foreign issuers are rms incorporated outside the United States,
nancial rms have SIC codes in the 6000s, and utilities in the 4900s.

**

Global
issuers

Domestic
issuers

Difference

Total assets ($B)


Market capitalization ($B)
Leverage
Book-to-market ratio
Percentage of foreign issuers (%)
Percentage of nancial rms (%)
Percentage of utility rms (%)

127.92
41.26
0.30
0.55
22
26
21

29.97
10.08
0.33
0.67
20
25
21

97.95**
31.18**
0.04**
0.12**
2
1
0

No. of issuers

219

523

Differences marked with are signicant at the 5% levels.

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L. Petrasek / Journal of Banking & Finance 36 (2012) 21102121

Table 2
Summary statistics for the global and domestic bond sample. The table reports summary statistics for the sample of global and domestic bonds of global bond issuers. Information
on new bond issues, including bond type, total principal issued, and bond placements, is from the SDC data base. Total principal is the principal amount placed in all markets.
Foreign principal as % of total principal shows the percentage of the total principal issued that is initially placed with non-US investors. Bond characteristics and bond rating
history are from the FISD database. Trading yields and yield spreads are derived from secondary market transaction prices reported on TRACE. The numbers reported in the table
are the means (medians) of individual bond averages.
Sample mean

*
**

Sample median

Global

Domestic

Difference

Global

Domestic

Difference

Total principal ($M)


Foreign principal as % of total principal
Trading yield (%)
Trading yield spread (%)
Time to maturity (yrs when traded)
Age (yrs when traded)
Coupon (%)
Percentage of callable bonds (%)
Percentage of inv. grade bonds (% when traded)

1652.42
32.37
5.95
2.28
10.51
1.37
5.72
63
85

712.08
10.54
6.10
2.43
10.58
3.23
5.85
68
84

940.34**
21.83**
0.16*
0.15*
0.07
1.86**
0.13*
4
1

1197.25
39.44
5.79
1.87
7.82
0.86
5.73
100
100

462.05
0.00
5.93
2.05
7.05
2.66
5.77
100
100

735.20**
39.44**
0.14*
0.18**
0.77
1.80**
0.04
0
0

No. of sample trades per bond


No. of bonds (930)
No. of issuers (135)

736
480
135

456
450
135

280**

296
480
135

99
450
135

197**

Differences marked with are signicant at the 10% levels.


Differences marked with are signicant at the 5% levels.

Inc. Overall, 2175 global and US bonds were issued by 219 global
bond issuers between January 1998 and December 2008.
The nal sample is comprised of a subset of bonds that are actively traded in US secondary markets. The source of secondary
market prices for global and US bonds is the Trade Reporting and
Compliance Engine, commonly referred to as TRACE. Since June
2002, all broker-dealers active in the US market have an obligation
to report transactions in publicly registered corporate bonds to
TRACE. Since global bonds are like US public bonds registered with
the SEC, they are subject to TRACE reporting and dissemination.
Eurobonds, in contrast, are not subject to TRACE reporting, and
therefore are not included in the sample. The information disseminated by TRACE includes bond CUSIP, transaction price, date, time,
and volume. I complement this data with bond descriptive information and bond ratings from the Fixed Income Securities Database (FISD).
The sample of secondary market transactions starts in 2003, the
rst full year of TRACE reporting. It is comprised of a subset of actively traded bonds. Specically, the analysis requires data on both
global and domestic bond transactions from the same day. Therefore, a global (domestic) bond is required to trade on the same
day as another domestic (global) bond of the same issuer to enter
the sample. Further, sample bonds are required to have at least
5 years to maturity at the time of trading. There are 930 such bonds
issued by 135 issuers; 480 are global bonds and 450 are US domestic bonds.
Several lters are applied to the sample trades. First, global
(domestic) bond trades must be matched by issuer and trading
day with domestic (global) bond trades to be included in the sample. Further, only institutional-sized trades of 100,000 dollars or
larger are examined. Retail-sized trades are discarded because
their transaction costs account for a non-negligible percentage of
the traded price (Edwards et al., 2007). Nevertheless, all trades
are considered when calculating measures of corporate bond
liquidity. In addition, the data are purged of trade reports that were
subject to cancellations or corrections, are missing key information, include commission in the price, or were entered by multiple
dealers.8 Next, I remove 3321 trades that appear to be outliers. The
outliers are identied on the basis of their relative distance from a
8
Dick-Nielsen (2009) argues that transactions with zero returns for consecutive
trades are the result of double reporting in interdealer trading. Failing to remove
these duplicates could bias the liquidity measures. Following Dick-Nielsen (2009), I
remove all reports with zero returns for consecutive trades.

neighborhood of the nearest valid observations.9 The nal sample


consists of 558,362 trades that take place between January 2003
and March 2009.
Table 2 provides summary statistics for the sample bonds. All
the sample bonds are large issues, but the average global bond issue of $1652 million is more than two times larger than the average domestic bond issue of $712 million. This marked difference in
issue size is consistent with the nding of Miller and Puthenpurackal (2005) that the decision to issue globally is an increasing function of issue size. Foreign placements amount to 32.4% of the total
proceeds for the average global bond, and 10.5% for the average
domestic bond. The foreign placements for domestic bonds are private placements. Whereas the median domestic bond involves no
foreign placements, 39.4% of the proceeds from the median global
bond come from non-US investors.
Bond prices are transformed into spreads over US Treasury
yields. Specically, trade prices are rst adjusted for accrued interest and converted into yields to maturity. The yield spreads are
then calculated by subtracting the nearest corresponding constant
maturity Treasury rates from the yields.10 Table 2 reports the bondweighted averages of trading yields and yield spreads.11 Trading
yields are 5.95% for the average global bond and 6.10% for the average domestic bond. Trading yield spreads average 2.28% for global
bonds and 2.43% for domestic bonds, but they change greatly over
the sample period. The spreads range from just above 1% in January
2003 to more than 6% in September 2008. The summary statistics
suggest that yield spreads tend to be lower for global bonds than
for domestic bonds, but a simple comparison of yield spreads without controlling for issuer and time effects could be misleading.
The summary statistics also indicate that global and US bonds
are comparable with respect to their maturity, embedded call options, and ratings. A large part of the sample bonds are callable,
and the call option feature must be taken into account in the analysis. It is also important to control for differences in bond age. Glo-

9
Observations that are more than three standard deviations away from a
neighborhood of the 30 nearest valid observations are considered to be outliers.
The tests are not sensitive to the inclusion of these observations.
10
The daily yield curve for constant maturities of 2, 5, 10, and 30 years is obtained
from the US Department of Treasury. Linear interpolation is used for each month
within the intermediate maturities, and the yield curve is assumed to be at beyond
30 years.
11
The averages are rst calculated for each bond across all sample trades and then
across bonds.

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L. Petrasek / Journal of Banking & Finance 36 (2012) 21102121

Table 3
Yield spreads between global and domestic bonds: paired t-tests. The table reports the differences in trading yields between matched pairs of global and domestic bonds. All
bonds are non-callable and matched by issuer. In addition, the bonds in Panel A mature within 2 years from one another. The bonds in Panel B have an issue size within 10% from
one another. The bonds in Panel C are matched by both maturity and size. The yield difference for each bond pair is calculated from all transactions that occur on the same days.
Shown is the number of matched pairs, the mean difference in trading yield spreads between global and domestic bonds across the matched pairs, the t-statistic for the mean
difference, the median difference in trading yield spreads, and the percentage of bond pairs for which the difference is negative.
No. of matched bond pairs

*
**

Mean difference

T-statistic

Median difference

Negative difference (% of pairs)

Panel A: Matched by issuer and maturity


All bonds
137
Investment grade
132
Speculative grade
25

0.22**
0.21**
0.61*

5.31
5.19
1.82

0.09**
0.09**
0.24*

73
75
64

Panel B: Matched by issuer and size


All bonds
139
Investment grade
136
Speculative grade
26

0.13**
0.10**
0.92**

3.43
3.15
2.17

0.07**
0.07**
0.86**

62
63
62

Panel C: Matched by issuer, maturity and size


All bonds
59
Investment grade
56
Speculative grade
13

0.20**
0.18**
1.02

3.44
3.47
1.63

0.08**
0.08**
0.86

69
73
62

Mean (median) differences marked with are signicant at the 10% levels according to the t-test (Wilcoxon signed rank test).
Mean (median) differences marked with are signicant at the 5% levels according to the t-test (Wilcoxon signed rank test).

bal bonds tend to have a lower age (1.37 years) than domestic
bonds (3.23 years) because rms are less likely to offer domestic
bonds after issuing global bonds (see Fig. 1).
5. Empirical analysis
5.1. Global and domestic bond yields
Prior research shows that global bond offerings are associated
with lower yields and borrowing costs than comparable domestic
offerings (Miller and Puthenpurackal, 2005). However, different offer yields of global and domestic bonds do not necessarily imply
that secondary market prices also differ. The prices of new corporate bond issues could also be affected by transitory factors such as
underpricing (Cai et al., 2007) or issuance price pressure (Newman
and Rierson, 2004).
To examine whether investors place higher valuations on global
bonds, this section compares the yields to maturity of global and
domestic bonds in secondary markets. When global and domestic
bonds of one issuer trade on the same day, their trading yields reect the same credit risk. However, the bonds may differ in their
size, maturity, or embedded call options. I use two methods to control for these characteristics. First, I create a matched sample of
bond pairs that have no call options and are similar in terms of
issue size and maturity. I conduct paired t-tests and Wilcoxon
signed rank tests to examine if these bonds trade at the same
yields. The second method is to estimate panel regressions that relate yield differentials to differences in bond characteristics.
Matched sample estimation has been widely used to test for differences in bond prices and transaction costs. I apply the matched
sample approach to test for differences in yields to maturity and
liquidity between global and domestic bonds. Specically, global
and domestic bonds that are non-callable and issued by the same
rms are matched into pairs by term to maturity and/or issue size.
For each pair, I calculate the average difference in trading yields
between the global and the domestic bond using only trades that
occur on the same days. I then compute the mean and median difference across all bond pairs and perform t-tests for the signicance of the mean difference. I also test for differences between
the matched pairs using the non-parametric Wilcoxon signed rank
test.
Panel A of Table 3 presents the test results for bonds matched
by issuer and term to maturity. Specically, the pairs are made
up of one global bond and one domestic bond that mature within

2 years from one another. There are 137 such bond pairs, made up
of 139 different bonds12 issued by 23 rms. As Panel A of Table 3
shows, global bonds trade on average at yields 22 basis points below
the yields on domestic bonds of the same issuers with similar maturities. The average difference in yields between all pairs of global and
domestic bonds is negative and statistically signicant at the 5% level using a paired t-test. The median yield difference of 9 basis
points is also statistically signicant using a Wilcoxon signed rank
test. The differences are negative for 73% of the bond pairs.
When the yields of investment grade bonds (132 pairs) and
speculative grade bonds (25 pairs)13 are examined separately, the
difference is greater for speculative grade bonds than for investment
grade bonds. The average difference between global and domestic
bonds is 21 basis points for investment grade bonds compared to
61 basis points for speculative grade bonds. Prior studies show that
illiquidity has a larger impact on the yields of speculative grade
bonds than on investment grade bonds (see, e.g. Longstaff et al.,
2005; Chen et al., 2007; Mahanti et al., 2008). Therefore, the nding
of larger yield differences for speculative grade bonds is consistent
with the liquidity explanation of the spread between global and
domestic bonds.
Panel B of Table 3 reports the results if bonds are matched by
issuer and issue size. The bond pairs are selected to have an issue
size within 10% from one another. There are 139 such pairs, made
up of 121 bonds issued by 17 rms. The average yield spread between the global and domestic bonds is 13 basis points, statistically signicant at the 5% level using a paired t-test or a Wilcoxon
signed rank test. The spread is larger for speculative grade bonds
than for investment grade bonds. Finally, in Panel C of Table 3,
bonds of the same issuers are matched by both time to maturity
and issue size. There are 59 possible bond pairs, made up of 78 different bonds issued by 16 rms. The mean yield spread between
global and domestic bonds is 20 basis points, and the median
spread is 8 basis points. The mean and median yield spread between global and domestic bonds is negative and signicant at
the 5% level.
Bond traders tend to regard the Treasury zero curve as the riskfree zero curve and measure a corporate bond yield spread as the
spread of the corporate bond yield over the yield on a similar gov-

12

One global (domestic) bond can match with two or more domestic (global) bonds.
Most speculative bonds are issued as investment grade bonds and enter the
speculative sample later due to downgrades so the same bond can be in both groups
at different times.
13

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L. Petrasek / Journal of Banking & Finance 36 (2012) 21102121

ernment bond (Hull et al., 2004). Therefore, Constant Maturity


Treasury yields are used as the benchmark rate for corporate bonds
throughout the paper. However, the tests in which bonds are
matched by term to maturity (Panel A and Panel C in Table 3) do
not require a specication of the benchmark rate. To examine
whether the results are sensitive to the benchmark rate assumption, I perform the t-tests in Panel A and Panel C of Table 3 using
bond yields rather than yield spreads. I nd that the results using
bond yields (not shown) are virtually identical to those using yield
spreads shown in Table 3 if bonds are matched by term to
maturity.
Paired t-tests provide a simple method to test for differences in
yields, but restrict the sample to a small number of non-callable
bonds with similar maturities and issue sizes. Next, I estimate panel regressions to examine the full sample of 930 global and
domestic bonds and control for additional bond characteristics.
The regression model is as follows:

Sp g
readijd

g b0 Con trols
g
b0 b1 Gl obal
ijd
ijd eijd ;
2

Table 4
Yield spreads between global and domestic bonds: panel regressions with issuer/day
xed effects. The table presents estimates from regressions of trading yield spreads on
an indicator variable that equals one for global bonds, the interaction of the global
bond dummy with the speculative grade indicator variable, and several control
variables. Maturity is the time to maturity and Age is the bond age, both measured in
years at the time of trading. Principal is the natural logarithm of the outstanding bond
principal. Call option is an indicator variable equal to one if the bond is callable.
Liquidity crisis is a dummy variable that equals one if the spread between the 3month LIBOR and the 3-month Treasury bill rate exceeds 2%. The regressions are
estimated using panel data transformed by subtracting issuer/day xed effects.
Robust t-statistics adjusted for clustering by bond are in parentheses.

Global bond

(2)

(3)

0.233**
(4.42)

0.104**
(5.59)
0.002**
(4.56)
0.029**
(2.95)
0.037
(0.70)
0.211**
(2.30)

0.109**
(4.08)
0.487**
(2.81)
0.094**
(6.07)
0.002**
(4.97)
0.036**
(3.81)
0.041
(0.77)
0.173*
(1.93)

0.088**
(3.05)
0.458**
(2.65)
0.094**
(6.15)
0.002**
(5.04)
0.034**
(3.66)
0.040
(0.78)
0.177**
(2.07)
0.378**
(3.36)

0.18
558,362
930
135

0.20
558,362
930
135

0.21
558,362
930
135

Speculative  global
Maturity
Maturity squared

where Spreadijd is the yield spread on the ith issue of rm j traded on


day d. Globalijd is a dummy variable set equal to one for global
bonds. Controlsijd is a vector of issue-specic control variables,
including the time to maturity measured in years, the square of
the time to maturity, bond age in years, the natural logarithm of
the bond principal, and an indicator variable set equal to one if
the bond is callable.
The set of independent variables includes the time to maturity
to control for the term structure of credit risk. The contingent claim
approach to valuing corporate debt pioneered by Merton (1974)
predicts that credit risk premiums for investment grade debt are
increasing with term to maturity, but the relation is non-linear.
Therefore, the squared term to maturity is also included in the
regression. Age and principal are proxies for corporate bond liquidity that are not directly related to global bond issuance. Alexander
et al. (2000) and Edwards et al. (2007) show that trading volume of
corporate bonds declines as they become older and settle into
institutional portfolios. Chen et al. (2007), and Bao et al. (2011),
among others, show that bond age is positively related to corporate
yield spreads. Therefore, I control for bond age at the time of trading. Bond principal has been widely used to proxy for corporate
bond liquidity because larger issues tend to trade more frequently
and have a higher trading volume. The regressions are estimated
on panel data transformed by subtracting issuer/day xed effects.
Specically, each observation on the ith issue of rm j is transformed by subtracting the panel mean for all bonds of rm j traded
on day d. The transformation removes the rm-specic effect that
may be correlated with the error terms.
Table 4 presents the regression estimates of yield spreads between global and domestic bonds and the robust t-statistics adjusted for clustering by bond. The main result is presented in
column (1). The coefcient estimate on the global dummy variable
in is 23 basis points, signicant at the 5% level, showing that global bonds trade at lower yields than comparable domestic bonds
issued by the same rms. The magnitude of the regression estimate
is similar to that from paired t-tests. The specication in column
(2) allows for different coefcient estimates for investment and
speculative grade bonds. Consistent with the results from t-tests,
the effect of global trading is smaller in absolute value for investment grade bonds (11 basis points) than for speculative grade
bonds (60 basis points). The difference in coefcient estimates
between speculative and investment grade bonds is signicant at
the 5% level.
All the control variables have the expected sign. In line with
Mertons (1974) model of the maturity structure of credit risk, time
to maturity has a positive non-linear effect on credit spreads. Bond

(1)

Age
Principal
Call option
Liquidity crisis  global
Adj. R2
No. of trades
No. of bonds
No. of issuers
*
**

Coefcients marked with are signicant at the 10% levels.


Coefcients marked with are signicant at the 5% levels.

age also has a signicant positive effect on yields. On average, one


additional year since issuance increases the required yield by three
basis points. This estimate is consistent with the ndings of Chen
et al. (2007) and Bao et al. (2011) regarding the effect of age on corporate bond yields. Issue size is not signicantly related to yields
after controlling for other bond characteristics. The contribution
of the call option feature to yield spreads is 1721 basis points.
Overall, the regression model explains 1821% of the differences
in yields between different bonds of the same issuers, and the contribution of the global dummy to the R-squared is around 2%.
To better understand the factors that explain the yield spread
between global and domestic bonds, I estimate Eq. (1) with year
dummies and an indicator variable for liquidity crises. None of
the year dummy variables (not reported) is statistically signicant
when interacted with the global bond indicator variable. Column
(3) in Table 4 reports the regression results including the indicator
of liquidity crises interacted with the global dummy variable. A
liquidity crisis is said to occur when the spread between the 3month LIBOR and the 3-month Treasury bill rate (the TED spread)
exceeds 2%. This denition of crises corresponds to roughly 5% of
the sample days, mostly during the second half of 2008 and in
2009. The yield spread between global and domestic bonds remains
on average negative and statistically signicant after accounting for
liquidity crises. The average spread is 9 basis points for investment grade bonds and 55 basis points for high yield bonds. However, the spread widens by 38 basis points during crises, and the
increase is statistically signicant at the 1% level. These ndings
suggest that the price difference between global and domestic
bonds is related to liquidity.
In untabulated results, I estimate the yield spread regression in
Table 4 on different subsamples. First, all callable bonds are excluded from the analysis. Another test excludes bonds for a period
of 6 months after issuance because new issues are known to be
more liquid than older bonds (see, e.g. Alexander et al., 2000; Chen

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L. Petrasek / Journal of Banking & Finance 36 (2012) 21102121

et al., 2007; Edwards et al., 2007; Bao et al., 2011). Finally, I exclude
bonds issued by nancial rms and utilities. In all cases, I nd that
the subsample results are not substantively different from those
using the entire sample.
5.2. Measures of corporate bond liquidity
A major argument in favor of global bond issuance is greater
liquidity. Liquidity has multiple dimensions, and many alternative
measures of corporate bond liquidity have been proposed in the
literature.14 I measure liquidity in several ways, including trading
volume, trading frequency, zero volume days, price volatility, the
price impact of trades, and the autocovariance of daily returns.
The liquidity measures use data from TRACE for the US bond
market, complemented with additional information from TRAX
for the Eurobond market. The monthly trading volume in the US
bond market is computed using all trades on TRACE over a period
of 20 preceding trading days. For condentiality reasons, TRACE
does not disseminate the exact trading volume for transactions larger than the cap value of $5 million ($1 million for high yield
bonds). The actual transaction volume is therefore assumed to be
equal to the cap value. The monthly trading volume for the Eurobond market is obtained by multiplying the average daily volume
for the previous month provided by TRAX by 20. In contrast to
reporting to TRACE, which is mandatory for all broker-dealers registered in the US, only ICMA members have an obligation to report
their trades to TRAX. However, most Eurobond dealers are members of the ICMA. There is also very little overlap between ICMA
member rms and US bond dealers.15 Therefore, TRAX volume is
a reasonable proxy for trading activity in the Eurobond market.
I compute three measures of trading frequency from TRACE: the
monthly number of trades, the monthly number of large trades,
and the monthly number of zero-volume days counting the days
on which no large trades occur. Large trades are dened as transactions of 100,000 dollars or greater. Smaller, retail-sized trades
may not be indicative of greater liquidity (see, e.g. Edwards et al.,
2007). All the measures of trading frequency are counted over
the last 20 trading days preceding each observation.
Price volatility is related to liquidity through dealer inventory
risk (see, e.g. Stoll, 1978). I compute two volatility measures: the
monthly price range as a percentage of the average price, and the
coefcient of variation of the transaction price. The coefcient of
variation is the monthly standard deviation scaled by the average
price. Both measures are computed from intraday price changes
over the period of 20 trading days preceding an observation, and
only large trades are used in their calculation.
Further, I consider two return-based liquidity measures derived
from daily closing prices: the Amihud ratio and the Gamma measure (c). Let Pt denote the closing price on day t, adjusted for the
interest accrued since the last coupon date. Closing prices are obtained from the last large transaction on each day. For bonds trading on two consecutive business days, I calculate the daily
percentage return as rt = 100  (ln Pt  ln Pt1). Both the Amihud
illiquidity and c are computed only for the subset of bonds with
15 or more daily return observations over a 20-day period. There
are 528 such bonds with 355,357 transactions, and the analysis
of return-based liquidity measures is conducted on this subsample.
Liquidity can be dened as the ability to buy or sell an asset in
large quantity quickly and without affecting the market price. To
measure illiquidity as the price impact of trading, I calculate the ratio proposed by Amihud (2002):
14

See, e.g., Houweling et al. (2005), Chen et al. (2007), and Bao et al. (2011).
The ICMA currently has about 400 members in 50 countries, and its TRAX system
covers the greater part of the Eurobond market. Only three ICMA member rms are
domiciled in the United States.
15

Amihud

Absrt
;
Vt

where Vt is the daily trading volume measured in millions of dollars.


The Amihud ratio is calculated for each non-zero return day, and
averaged over the period of 20 business days.
Finally, I construct a liquidity measure from the autocovariance
in daily returns. Roll (1984) rst considered a similar measure as a
proxy for the bid-ask spread, but Bao et al. (2011) argue that the
measure can capture additional aspects of liquidity such as market
depth and resilience. Furthermore, Bao et al. (2011) show that the
measure explains individual bond yield spreads with large economic signicance. Following Bao et al. (2011), I dene the measure of illiquidity c as:

c20 Cov rt ; rt1 :

Table 5 summarizes the trade-based liquidity measures for global


and domestic bonds. The average monthly trading volume in either
the US market or in the Eurobond market located overseas is almost
three times larger for global bonds than for domestic bonds ($95
million vs. $33 million in the US market, and $29 million vs. $13
million in the overseas market). The median differences are even
greater, in particular in the overseas market. The median global
bond has a trading volume of 12 million dollars in the Eurobond
market, compared to less than 1 million dollars for the median
domestic bond. In the US market, the average global bond trades
186 times per month, of which 59 trades are large (of $100,000 or
more). In contrast, the average domestic bond trades only 80 times
per month, of which merely 22 trades are large. Considering only
large trades, the average US bond has 14 zero volume days per
month, compared to 8 zero volume days for the average global
bond. Thus, although global bonds are signicantly more liquid than
domestic bonds, they still do not trade on one out of every three
business days if only large trades are considered. This result reects
the well-known fact that trading is less frequent in the corporate
bond market than in the stock market.
Table 5 further reveals that the prices of global bonds are less
volatile than the prices of domestic bonds. Global bonds have a signicantly smaller price range and coefcient of variation. Also, the
Amihud measure indicates that global bond prices are less adversely impacted by large trades than domestic bond prices. The
estimated price impact of trading one million dollars is 67 basis
points for the average global bond, and 87 basis points for the average domestic bond. Finally, global bonds exhibit signicantly less
illiquidity as measured by c. The average global bond in the sample
has a c coefcient of 0.26, whereas the average domestic bond has
a c of 0.66. Overall, the estimates of c are in the same range as
those obtained by Bao et al. (2011) using only large trades.
5.3. Global and domestic bond liquidity
The summary statistics indicate that global bonds are considerably more liquid than domestic bonds. However, it is not clear
whether the liquidity advantage of global bonds is related to their
multimarket trading, or if it merely reects their larger issue size
and other characteristics. Therefore, the tests in this section examine whether global bonds are more liquid than domestic bonds of
the same issuers with comparable characteristics such as issue
size, bond age, maturity, and embedded call options. Similar to
the analysis of trading yields, I use two methods to test for differences in liquidity between global and domestic bonds: matched
sample analysis and xed effects regressions.
First, I conduct paired t-tests and Wilcoxon signed rank tests on
a matched sample of global and domestic bonds that were issued
by the same rm and have a similar issue size. Table 6 reports
the paired t-tests for liquidity differences between global and

2117

L. Petrasek / Journal of Banking & Finance 36 (2012) 21102121

Table 5
Summary statistics for liquidity measures. The table presents summary statistics for several transaction-based measures of corporate bond liquidity. Trading volume is the
monthly trading volume, reported separately for the US market and the overseas (Eurobond) market. Other liquidity measures are based on data from the US bond market. Large
trades are transactions of at least 100,000 dollars. Price range is scaled by the average price. Coefcient of variation is the standard deviation of prices scaled by the average price.
Amihud illiquidity is dened as the absolute value of daily returns divided by volume in millions of dollars. Gamma is the negative of the autocovariance in daily returns. Only
large trades are used to compute the number of zero volume days, price range, coefcient of variation, Amihud illiquidity, and Gamma. Gamma and Amihud illiquidity are
available for a subsample of 528 bonds.
Sample mean


**

Sample median

Global

Domestic

Difference

Global

Domestic

Difference

US trading volume ($M)


Overseas trading volume ($M)
Monthly # of trades
Monthly # of large trades
Monthly # of zero volume days
Price range (%)
Coefcient of variation (%)
No. of bonds (930)
Amihud illiquidity (%)
Gamma (%)

94.85
29.45
186.23
59.07
8.11
6.59
1.80
480
0.67
0.26

32.92
13.28
79.93
21.92
13.63
9.64
2.88
450
0.87
0.66

61.93**
16.17**
106.30**
37.15**
5.52**
3.05**
1.08**

60.37
11.78
104.36
40.23
7.57
4.93
1.34
480
0.59
0.09

13.45
0.63
29.76
10.05
15.00
6.02
1.92
450
0.74
0.29

46.92**
11.15**
74.60**
30.18**
7.43**
1.09**
0.58**

No. of bonds (528)

374

154

374

154

0.20**
0.40**

0.15**
0.20**

Differences marked with are signicant at the 10% levels.


Differences marked with are signicant at the 5% levels.

Table 6
Liquidity differences between global and domestic bonds: paired t-tests. The table reports the differences in liquidity between matched pairs of global and domestic bonds. All
bonds are non-callable, matched by issuer, and have an issue size within 10% from one another. The liquidity differences for each pair are calculated from all transactions that
occur on the same days. Shown is the number of matched bond pairs, the liquidity of the global and domestic bonds, the mean difference in liquidity between global and domestic
bonds across the matched pairs, and the t-statistic for the difference.

*
**

Liquidity measure

No. of matched bond pairs

Global bond liquidity

Matched by issuer and size


US trading volume ($M)
Overseas trading volume ($M)
Number of trades
Number of large trades
Number of zero volume days
Price range (%)
Coefcient of variation (%)
Amihud illiquidity (%)
Gamma (%)

139
139
139
139
139
139
139
91
91

78.53
29.63
165.19
52.71
7.63
5.30
1.44
0.64
0.29

Issue size ($M)

139

1011.30

Domestic bond
liquidity

Mean difference in liquidity

T-statistic for
difference

58.88
15.64
137.94
42.68
9.47
6.06
1.82
0.78
0.46

19.65**
13.99**
27.25**
10.03**
1.84**
0.76*
0.38**
0.14**
0.18*

2.63
3.56
2.31
2.92
5.09
1.82
2.99
2.57
1.92

1008.35

2.95

0.91

Differences marked with are signicant at the 10% levels.


Differences marked with are signicant at the 5% levels.

domestic bonds matched by issuer and issue size. All sample bonds
are non-callable, matched by issuer, and have an issue size within
10% from one another. The sample is the same as that used in the
analysis of yields spreads in Panel B of Table 3. Although matching
by issue size typically reduces the liquidity differences between
global and domestic bonds (compare with Table 5), the differences
remain large and statistically signicant. For example, the monthly
trading volume of domestic bonds in the US bond market increases
to 59 million dollars after matching domestic bonds by size with
global bonds, but remains signicantly below that of global bonds
of 79 million dollars. Similarly, the number of zero volume days for
domestic bonds decreases to 9.5 after matching, which is signicantly more than the 7.6 zero volume days for global bonds. The
measures of price volatility and the return-based liquidity measures also indicate that global bonds are signicantly more liquid
in the matched sample analysis.
Alexander et al. (2000) and Edwards et al. (2007), among others, show that trading in corporate bonds is abnormally high in
the rst few months after issuance. Recently issued bonds could
therefore appear more liquid than seasoned bond issues. To address this concern, I exclude from the matched sample comparison
all newly issued bonds for 6 months after issuance. Table 7 reports
the results. Compared to Table 6, all bonds in Table 7 are less liquid, regardless of whether they are global or domestic bonds.

However, the differences in liquidity between seasoned global


and domestic bonds generally remain statistically and economically signicant. Trading volume in the US (overseas) market, for
instance, declines to 61 million dollars (23 million dollars) for
global bonds, but remains signicantly higher than the 44 million
dollars (7 million dollars) for domestic bonds. Other liquidity measures, except for the price range, also indicate that global bonds
have a liquidity advantage.
Finally, I estimate panel regressions with issuer/day xed effects for each liquidity measure. Panel data estimation makes it
possible to include all the bonds in the analysis and control for a
number of bond characteristics such as age, maturity, and embedded call options. Table 8 contains the estimates. The dependent
variables in these regressions are the log-transformed (except for
the number of zero-volume days) liquidity measures. The rst
two columns show that trading volume is larger for global bonds
than for domestic bonds, even after taking into account their larger
issue size and other characteristics. In addition to global issuance,
trading volume is signicantly related to bond age and issue size.
The coefcient on bond age is negative, conrming that volume declines as bonds age and settle in investors portfolios. The total
number of trades from TRACE is not signicantly related to global
issuance. It is greater for larger issues and bonds with embedded
call options. However, the total number of trades may not be a

2118

L. Petrasek / Journal of Banking & Finance 36 (2012) 21102121

Table 7
Liquidity differences between seasoned global and domestic bonds: paired t-tests. The table reports the differences in liquidity between matched pairs of seasoned global and
domestic bonds. The sample includes bonds seasoned for more than 6 months after issuance. All bonds are non-callable, matched by issuer, and have an issue size within 10%
from one another. The liquidity differences for each pair are calculated from all transactions that occur on the same days. Shown is the number of matched bond pairs, the
liquidity of the global and domestic bonds, the mean difference in liquidity between global and domestic bonds across the matched pairs, and the t-statistic for the difference.

*
**

Liquidity measure

No. of matched bond Pairs

Global bond liquidity

Domestic bond
liquidity

Matched by issuer and size


US trading volume ($M)
Overseas trading volume ($M)
Number of trades
Number of large trades
Number of zero volume days
Price range (%)
Coefcient of variation (%)
Amihud illiquidity (%)
Gamma (%)

125
125
125
125
125
125
125
63
63

61.36
22.54
122.74
46.23
8.51
7.25
2.01
0.77
0.36

44.46
7.45
93.30
33.98
10.42
8.02
2.35
1.06
0.55

Issue size ($M)

125

990.37

985.20

Mean difference in liquidity

T-statistic for
difference

16.90**
15.08**
29.44**
12.25**
1.91**
0.78
0.34*
0.29**
0.19*

2.86
6.97
4.54
4.21
4.91
1.32
1.87
3.26
1.89

5.16

0.99

Differences marked with are signicant at the 10% levels.


Differences marked with are signicant at the 5% levels.

Table 8
Liquidity differences between global and domestic bonds: panel regressions with issuer/day xed effects. The table presents estimates from regressions of several measures of
corporate bond liquidity on a dummy variable that equals one if the bond is global, and the interaction of the global bond dummy with the speculative grade indicator variable.
Also included are control variables for bond age, principal, time to maturity, and embedded call options. The dependent variables are the log-transformed (except for zero-volume
days) liquidity measures. The regressions are estimated on panel data transformed by subtracting issuer/day xed effects. Robust t-statistics adjusted for clustering by bond are in
parentheses.
Dependent variable

Global bond
Speculative  global
Age
Principal
Maturity
Maturity squared
Callable bond
Adj. R2
No. of trades
No. of bonds
No. of issuers
*
**

US trading
volume

Overseas trading
volume

No. of
trades

No. of large
trades

Zero volume
days

Price
range

Coeff. of
variation

Amihud
illiquidity

Gamma

0.187**
(2.92)
0.23
(1.29)
0.138**
(8.56)
0.616**
(10.06)
0.013
(0.40)
0.001
(0.28)
0.098
(1.02)

0.502**
(2.49)
0.62
(1.28)
0.369**
(7.46)
1.468**
(8.29)
0.013
(0.14)
0.001
(0.19)
0.198
(0.73)

0.070
(1.39)
0.20
(1.07)
0.021
(1.27)
0.455**
(8.60)
0.029
(1.49)
0.001
(1.24)
0.246**
(2.79)

0.112**
(2.46)
0.04
(0.21)
0.080**
(5.76)
0.486**
(9.31)
0.012
(0.53)
0.001
(0.94)
0.155*
(1.91)

1.224**
(6.01)
0.13
(0.29)
0.192**
(3.18)
1.979**
(9.74)
0.140**
(2.66)
0.003*
(1.97)
0.400
(1.46)

0.003**
(3.60)
0.01
(0.40)
0.037**
(8.24)
0.002*
(1.72)
0.005**
(11.56)
0.001**
(9.48)
0.005**
(2.55)

0.020**
(3.55)
0.02**
(5.54)
0.011**
(3.17)
0.037**
(8.24)
0.055**
(20.34)
0.001**
(14.95)
0.031
(1.43)

0.071**
(2.31)
0.28**
(5.54)
0.039**
(5.26)
0.115**
(4.59)
0.029**
(2.29)
0.001**
(2.42)
0.045*
(1.69)

0.044**
(5.22)
0.12**
(6.97)
0.008**
(3.91)
0.004
(0.61)
0.009**
(2.70)
0.001**
(2.25)
0.015*
(1.87)

0.27
558,362
930
135

0.20
558,362
930
135

0.16
558,362
930
135

0.31
558,362
930
135

0.19
558,362
930
135

0.18
558,362
930
135

0.31
558,362
930
135

0.23
355,357
528
98

0.20
355,357
528
98

Coefcients marked with are signicant at the 10% levels.


Coefcients marked with are signicant at the 5% levels.

good proxy for bond liquidity since the majority of trades are retail-sized. The number of large trades, which likely better measures
liquidity, is positively related to global issuance. Additionally, the
number of zero volume days is signicantly smaller for global
bonds than for domestic bonds.
The return-based liquidity measures in Table 8 also indicate
that global securities are more liquid. Measures of price volatility,
the price range and the coefcient of variation, are lower for global
bonds. The Amihud illiquidity, which is a proxy for the price impact of trading, is signicantly lower for global bonds, in particular
if they are rated below investment grade. The measure of price
reversals (c) is strongly negatively related to the global bond dummy variable, and the effect is larger for speculative grade bonds. By
almost all measures, corporate bonds become less liquid as they
age and settle in investors portfolios, and larger issues are more liquid than smaller ones. However, differences in bond characteristics such as issue size, age, or maturity do not subsume the
signicance of global issuance for corporate bond liquidity.

5.4. Corporate bond prices and liquidity


Multiple liquidity measures indicate that global bonds have a
liquidity advantage over domestic bonds. I investigate next
whether the liquidity measures are priced, and whether they can
explain why investors require lower yields on global bonds. To
examine these questions, I re-estimate the yield spread regressions
(Eq. (1)) with liquidity measures among the explanatory variables.
The regression estimates are reported in Table 9. The sample in Table 9 is not the full sample because return-based liquidity measures are only available for a subset of 528 bonds. However, the
subsample yields very similar coefcient estimates as the full sample without controlling for liquidity (compare column (1) in Table
9 with column (2) in Table 4).
Column (2) of Table 9 provides the estimation results with several liquidity measures among the explanatory variables, including
the total trading volume, number of trades, number of zero volume
days, price range, and coefcient of variation. Trading volume is

2119

L. Petrasek / Journal of Banking & Finance 36 (2012) 21102121


Table 9
Liquidity and the spreads between global and domestic bonds: Panel regressions with
issuer/day xed effects. The table presents estimates from regressions of trading yield
spreads on a dummy variable that takes a value of one for global bonds, the
interaction of the global bond dummy with the speculative grade indicator variable,
and various measures of corporate bond liquidity. Trading volume is the sum of the
trading volume in the US bond market and in the Eurobond market. All liquidity
measures, except for the number of zero-volume days, are log-transformed. Also
included are control variables for bond age, principal, time to maturity, and
embedded call options. The regressions are estimated using panel data transformed
by subtracting issuer/day xed effects. Robust t-statistics adjusted for clustering by
bond are in parentheses.

Global bond
Speculativeglobal
Maturity
Maturity squared
Age
Principal
Call option

(1)

(2)

(3)

0.135**
(3.04)
0.488**
(2.49)
0.106**
(5.26)
0.003**
(4.18)
0.053**
(3.76)
0.075
(1.01)
0.199*
(1.87)

0.087**
(2.16)
0.399**
(2.60)
0.025
(0.97)
0.001
(1.20)
0.037**
(3.09)
0.026
(0.37)
0.137
(1.55)
0.160**
(3.25)
0.428**
(6.18)
0.044**
(6.16)
1.569
(1.06)
1.168**
(4.12)

0.045
(1.25)
0.229
(1.55)
0.010
(0.44)
0.001
(0.72)
0.030**
(3.02)
0.001
(0.02)
0.123
(1.45)
0.064
(1.29)
0.405**
(5.73)
0.042**
(5.69)
1.702
(1.11)
1.028**
(3.73)
0.755**
(7.29)
0.891**
(4.09)
0.40
355,357
528
98

Trading volume
No. of trades
Zero volume days
Price range
Coefcient of variation
Amihud illiquidity
Gamma
Adj. R2
No. of trades
No. of bonds
No. of issuers
*
**

0.24
355,357
528
98

0.35
355,357
528
98

Coefcients marked with are signicant at the 10% levels.


Coefcients marked with are signicant at the 5% levels.

measured as the sum of the trading volume in the US bond market


and in the Eurobond market. All liquidity measures, except for the
number of zero-volume days, are log-transformed. The yield
spread between global and domestic bonds narrows after controlling for the liquidity measures, but remains statistically signicant.
The estimated spread is 9 basis points for investment grade
bonds and 49 basis points for speculative grade bonds. Further,
several liquidity measures in column (2) are signicantly related
to corporate bond yields. A greater trading volume, smaller number of zero volume days, and smaller price volatility as measured
by the coefcient of variation are associated with lower yield
spreads. In accordance with the ndings of Bao et al. (2011), the
term to maturity is no longer statistically signicant after controlling for liquidity, and the number of trades enters the regression
with a positive sign. However, the coefcient on bond age remains
positive and statistically signicant. The R-squared increases from
0.24 to 0.35 after controlling for the liquidity measures.
The last column in Table 9 shows the regression results with all
the liquidity measures among the independent variables, including
Amihud illiquidity and the measure of price reversals (c).16 The
16
Multicollinearity does not appear to be a major concern with the model. Including
all the liquidity measures, the average variance ination factor is 3.17 (with a
maximum of 6.03) and the condition number is 5.76, which is not unusually high.

Table 10
The effect of taxes on the yield spreads between global and domestic bonds: Panel
regressions with issuer/day xed effects. The table presents estimates from regressions of trading yield spreads on an indicator variable that equals one for global
bonds, the interaction of the global bond dummy with the speculative grade indicator
variable, and several control variables including the coupon rate to account for the
effect of taxes. Maturity is the time to maturity and Age is the bond age, both
measured in years at the time of trading. Principal is the natural logarithm of the
outstanding bond principal. Call option is an indicator variable equal to one if the
bond is callable. Coupon is the coupon rate of the bond. Liquidity crisis is a dummy
variable that equals one if the spread between the 3-month LIBOR and the 3-month
Treasury bill rate exceeds 2%. The regressions are estimated using panel data
transformed by subtracting issuer/day xed effects. Robust t-statistics adjusted for
clustering by bond are in parentheses.

Global bond

(1)

(2)

(3)

0.224**
(4.30)

0.109**
(5.51)
0.002**
(4.56)
0.027**
(2.94)
0.045
(0.85)
0.212**
(2.29)
0.080**
(3.80)

0.102**
(4.05)
0.482**
(2.79)
0.091**
(5.95)
0.002**
(4.97)
0.035**
(3.83)
0.048
(0.92)
0.175*
(1.94)
0.077**
(3.59)

0.081**
(2.95)
0.452**
(2.62)
0.091**
(6.04)
0.002**
(5.04)
0.032**
(3.68)
0.047
(0.94)
0.178**
(2.08)
0.078**
(3.78)
0.382**
(3.40)

0.19
558,362
930
135

0.21
558,362
930
135

0.22
558,362
930
135

Speculative  global
Maturity
Maturity squared
Age
Principal
Call option
Coupon
Liquidity crisis  global
Adj. R2
No. of trades
No. of bonds
No. of issuers
*
**

Coefcients marked with are signicant at the 10% levels.


Coefcients marked with are signicant at the 5% levels.

yield spread between global and domestic bonds narrows further


after controlling for the return-based liquidity measures, and becomes statistically insignicant for investment grade bonds. The
combined coefcient estimate for speculative grade bonds of 27
basis points remains marginally signicant at the 10% level (the Fstatistic is 3.27). The two return-based liquidity measures, Amihud
illiquidity and c, have a signicant positive effect on corporate yield
spreads. Overall, liquidity measures explain 16% of the cross-sectional variation in yield spreads between different bonds issued by
the same rms, and account for a major part of the yield spread between global and domestic bonds.
5.5. Alternative hypotheses
Besides liquidity differences, the yield spread between global
and domestic bonds could also be consistent with the existence
of distinct investor clienteles. One type of clientele that has been
documented in the corporate bond market is induced by heterogeneous tax treatments of different groups of investors. For example,
Liu et al. (2007) argue that individual investors have an incentive
to invest in low coupon corporate bonds because of the asymmetric tax treatment of coupon income and premium or discount
amortization. Institutional investors are taxed symmetrically but
cannot fully eliminate the price effect due to the substantial transactions costs and the low liquidity of corporate bonds. Consistent
with the tax-induced clientele hypothesis, Liu et al. (2007) nd
that corporate bonds with higher coupon rates trade at lower
prices compared to corporate bonds with lower coupon rates.
The tax treatment of global bonds in the US does not differ signicantly from US domestic bonds (see footnote 7). However, tax-

2120

L. Petrasek / Journal of Banking & Finance 36 (2012) 21102121

induced clienteles may still exist if global bonds tend to be issued


with a lower coupon than domestic bonds. To control for the tax
effect found by Liu et al. (2007), I estimate Eq. (1) with the coupon
rate among the explanatory variables. As Table 10 reports, the coupon rate is positively and signicantly related to yields, suggesting
that taxes induce price differentials among corporate bonds. Nevertheless, the magnitude of the yield spread between global and
domestic bonds and its statistical signicance are little affected
by controlling for the tax effect (compare Table 10 with Table 4).
Yet another explanation of the spread between global and
domestic bonds is international bond market segmentation. Price
disparities between global and US bonds could reect an incomplete integration of the US and the international bond market.
However, it is unlikely that the markets remain segmented given
that global bonds have reduced the costs of cross-market trading
and settlement. Thus, only the low liquidity of corporate bonds
can hamper the ability of traders to arbitrage across different types
of bonds.

6. Conclusion
Large multinational corporations increasingly raise funds by
issuing global bonds. Global bonds resemble US domestic bonds,
but their distinctive features allow global bonds to be traded in
multiple markets. They are placed simultaneously with US and
overseas investors, and can be traded in the US bond market and
the Eurobond market, as well as between markets. However, the
effects of multimarket trading on corporate bond value are not well
understood. This paper examines how multimarket trading affects
corporate bond liquidity and prices in secondary markets.
The results conrm the hypothesis that multimarket trading
improves corporate bond liquidity. Compared to domestic bonds
issued by the same rms, global bonds are more liquid. They exhibit greater trading volumes in the US bond market and in the Eurobond market, trade more frequently, and their prices are less
volatile. Furthermore, the price impact of large trades is signicantly reduced for global bonds, and transitory price movements
that lead to serially correlated price changes are smaller. The
liquidity advantage of global bonds persists even after controlling
for their greater issue size and other characteristics, and it appears
to be related to their multimarket trading.
These ndings are consistent with microstructure models that
predict a positive relation between the number of potential investors and liquidity in over-the-counter markets. Dufe et al. (2005,
2007) develop a model in which transactions costs and liquidity in
over-the-counter markets, such as the corporate bond market, depend on the number of potential investors. Their model predicts
that illiquidity discounts are smaller if the number of qualied
investors is greater, and investors have access to multiple dealers.
Global bond offerings increase the pool of potential bondholders to
include investors overseas. In addition, liquidity in global bonds is
provided by both US bond dealers and Eurobond dealers. Thus, global bonds that are traded in multiple markets are more liquid than
US domestic bonds.
Another important nding is that the liquidity advantage of global bonds is priced. If two bonds of the same issuer, one global and
one domestic, trade on the same day, the yield on the global bond
is on average about 20 basis points lower. The yield difference is
greater for speculative grade bonds than for investment grade
bonds, and it increases during liquidity crises. In accordance with
the liquidity hypothesis, the spread between global and domestic
bonds is closely related to the differences in liquidity. In particular,
several trade-based liquidity measures explain a large part of the
yield difference between global and domestic bonds, and up to

16% of the cross-sectional variation in yield spreads between different bonds issued by the same rms.
Overall, the results show that investors value global bonds for
their greater liquidity. The liquidity advantage of global bonds
can account for the increasing popularity of global bonds in recent
years. The ndings also contribute to our understanding of the factors affecting corporate bond liquidity, and help explain prior evidence that global bond issues reduce the cost of debt.
Acknowledgements
I thank Charles Cao, Jaewon Choi, Stefano Corradin, Laura Field,
Pascal Francois, David Haushalter, Jean Helwege, Nancy R. Mahon,
Marco Rossi, and an anonymous referee for valuable comments. I
gratefully acknowledge nancial support from the Lamfalussy Research Fellowship of the European Central Bank. This research was
also supported in part by a Doctoral Research Award from the
Smeal College of Business.
Appendix A
See Table A1.

Table A1
The top 45 issuers of sample bonds.
Parent CUSIP

Corporate parent

Sample
trades

617446
25746U
842587
025537
060505
524908
209115
345370
149123
264399
590188
87612E
026874
00206R
370442
46625H
580135
78442P
035229
125581
225401
892331
92343V
949746
126408
438516
98385X
02209S
404280
494550
12189T
244199
319963
441815
45031U
49811T
079860
136375
172967
40414L
929903
002824
136385
263534

Morgan Stanley
4055
Dominion Resources Inc
3891
Southern Co
1095
American Electric Power Inc
602
Bank of America Corp
32,974
Lehman Brothers Holdings Inc
14,585
Consolidated Edison Inc
2087
Ford Motor Co
61,734
Caterpillar Inc
6894
Duke Energy Corp
3544
Merrill Lynch & Co Inc
24,042
Target Corp
15,516
AIG
9148
AT&T Inc
2127
General Motors Corp
127,326
JPMorgan Chase & Co
12,529
McDonalds Corp
4002
SLM Corp
12,767
Anheuser-Busch Cos Inc
2040
CIT Group Inc
10,871
Credit Suisse Group
13,273
Toyota Motor Corp
2237
Verizon Communications Inc
11,215
Wells Fargo, San Francisco, CA
3923
CSX Corp
1712
Honeywell International Inc
2108
XTO Energy Inc
3280
Altria Group Inc
17,015
HSBC
8013
Kinder Morgan Energy Partners
2477
Burlington Northern Santa Fe
1923
Deere & Co
3643
First Data Corp
4653
Household International Inc
646
iStar Financial Inc
1615
AIG Life Holdings (US) Inc
3941
BellSouth Corp
11,483
Canadian National Railway Co
331
Citigroup Inc
538
HCP Inc
647
Wachovia Corp, Charlotte, NC
3034
Abbott Laboratories
8217
Canadian Natural Resources Ltd
658
DuPont
8393

Sample
bonds

Credit
rating

25
23
21
19
19
19
17
17
16
16
16
16
15
15
15
14
14
13
12
12
12
12
12
12
11
11
11
10
10
10
9
9
9
9
9
8
8
8
8
8
8
7
7
7

Inv
Inv
Inv
Inv
Inv
Inv/Spec
Inv
Inv/Spec
Inv
Inv
Inv
Inv
Inv
Inv
Inv/Spec
Inv
Inv
Inv
Inv
Inv/Spec
Inv
Inv
Inv
Inv
Inv
Inv
Inv
Inv
Inv
Inv
Inv
Inv
Inv
Inv
Inv/Spec
Inv
Inv
Inv
Inv
Inv/Spec
Inv
Inv
Inv
Inv

L. Petrasek / Journal of Banking & Finance 36 (2012) 21102121

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