Informed Trading and the Dynamics of Client-dealer Connections in Corporate Bond Markets

Using a unique regulatory dataset with disclosed counterparty identities, we show that clients in corporate bond markets outperform when they trade with more dealers. The effect is stronger for informationally sensitive clients, assets, and during informationally intensive periods including Covid-19. Identifying clients who simultaneously trade in government and corporate bonds reveals that connections have larger and more persistent effects in the corporate bond market. Using a Kyle (1989)-type model, we show that both the degree of inter-dealer competition and the magnitude of private information could explain the strength of the performance-connection relation; we find stronger empirical evidence for an information-based mechanism.