This paper investigates the role of vulture investors in the governance and reorganization of a sample of 288 firms that default on their public debt. The improvement in post-restructuring operating performance relative to the pre-default level is greater when the vulture investor becomes CEO or chairman or gains control of the target firm. We also find positive abnormal returns for the target's common stock and bonds in the two days surrounding the announcement of a vulture purchase of public debt or equity. Our evidence suggests that vulture investors add value by disciplining managers of distressed firms.

We examine market making behavior of dealers for 55,988 corporate bonds, many of which trade infrequently. Dealers have a substantially higher propensity to offset trades within the same day rather than committing capital for longer periods for riskier and less actively traded bonds. Dealers’ holding periods do not decline with a bond's prior trading activity and in fact are lowest for some of the least active bonds. As a result, cross-sectional estimates of roundtrip trading costs do not increase as prior trading activity declines. Our results suggest that dealers endogenously adjust their behavior to mitigate inventory risk from trading in illiquid and higher risk securities, balancing search and inventory costs in equilibrium such that observed spreads can appear invariant to expected liquidity.