| Abstract: |
Many financial markets have recently become subject to new regulations
requiring transparency. This paper studies how mandatory transparency affects
trading in the corporate bond market. In July 2002, TRACE began requiring the
public dissemination of post-trade price and volume information for corporate
bonds. Dissemination took place in Phases, with actively traded, investment
grade bonds becoming transparent before thinly traded, high-yield bonds. Using
new data and a differences-in-differences research design, we find that
transparency causes a significant decrease in price dispersion for all bonds
and a significant decrease in trading activity for some categories of bonds.
The largest decrease in daily price standard deviation, 24.7%, and the largest
decrease in trading activity, 41.3%, occurs for bonds in the final Phase,
which consisted primarily of high-yield bonds. These results indicate that
mandated transparency may help some investors and dealers through a decline in
price dispersion, while harming others through a reduction in trading activity. |