N°23-85: Life After Default: How Dealer Intermediation Improves Default Recovery

Using hand-collected data on defaults of U.S. corporate bonds, we document the importance of dealers in the recovery process. After a bond defaults, trading intensifies and becomes concentrated among the bond’s primary pre-default dealer. This intermediation leads to a 4-7% improvement in the bond’s recovery value relative to par. Consistent with improved beliefs about recovery, driven by the primary dealer’s reallocation of defaulted bonds to specialized distressed-bond investors creating a positive feedback loop, prices in earlier transactions influence subsequent ones. Our findings highlight how dealer intermediation can stabilize distressed-bond markets and mitigate credit risk for bondholders.