Grundy, B., Verwijmeren, P. and Yang, A. (2024). Journal of Financial Intermediation 58, 101085
Abstract: We investigate the effect of intermediary frictions on asset pricing by examining the role of intermediaries in the convertible bond market. Buy-andhedge intermediaries distribute new convertible issues but face costs in doing so. We demonstrate that these costs affect the price of intermediated securities as their price is decreasing in anticipated future hedging costs. Issue and aftermarket prices are related to arbitrageurs’ hedging costs in both the crosssection and time series. Our findings demonstrate that trading frictions relevant to financial intermediaries are transmitted to asset prices.