We study how the Volcker rule affects bond pricing in the pritmary market. Following implementation, Volcker-affected bonds have greater credit spreads at issuance than non-affected bonds. Bond liquidity in the year after issuance is also negatively affected by the Volcker rule. These effects are concentrated in the Rule 144A bond market. The Volcker rule’s impacts on credit spreads and liquidity are stronger for bonds with lower expected liquidity. The results suggest that expected liquidity deterioration due to the Volcker rule increases the liquidity premium demanded by primary market investors.

We argue that firms’ ability to disinvest real assets helps rationalize the negative distress premiums in stocks, bonds, and, as we show, loans and firm assets. Using a real options model in which shareholders and debtholders share disinvestment proceeds, the model suggests that the stock (debt) distress premium becomes more negative with the proceeds paid out to that class, and that both premiums can be negative when debtholders receive most of the proceeds. Using hard-asset disinvestment-ability proxies, the stock (bond or loan) distress premium becomes less (more) negative with those proxies, possibly suggesting that shareholders benefit more strongly from nonsecured-asset disinvestments.