Raising Bond Capital in Segmented Markets

The difference between corporate bond yields at issuance and in secondary markets, the "issuance premium", spikes in bad times, increasing firms' costs of capital. Leveraging new bond-level data, I estimate a model of primary markets with imperfectly elastic investors and endogenous firms' supply of bonds that explains the impact of issuance premium on bond issuance. Using high-frequency variation in bond supply as an instrument, I find that investors are more sensitive to issuance premiums than the remainder of credit spreads. As issuance premiums rise in bad times, a more price-elastic primary market supports bond volumes