Abstract
This paper provides an innovative theoretical model and empirical evidence for how the illiquidity of corporate bonds, as trading noise, dampens firm-specific information incorporated into bond prices. We find a negative relation between bond illiquidity and synchronicity, and this empirical relation remains after applying robustness checks and endogeneity controls. Consistent with theoretical model implications, the effect of bond illiquidity as information friction is more pronounced for bonds with lower market sensitivity and for firms with higher degrees of information uncertainty and operating in weaker information environments. We also explore general bond return synchronicity determinants, including both bond attributes and firm fundamentals.
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