Intermediary Frictions and Asset Pricing

Abstract

We investigate the effect of intermediary frictions on asset pricing. By exploiting the role of hedge funds in the convertible bond market, we are able to study the effect of intermediary frictions outside distress periods. Buy-and[1]hedge intermediaries are common distributors of new convertible issues but face costs in doing so. We show that these costs affect the price of intermediated securities, both cross-sectionally and in time series. Our findings demonstrate that financial intermediaries’ trading frictions are transmitted to asset prices.