Who Benefits from Bond Market Modernization?

Abstract

Speed is a critical feature of modern capital markets. To identify the effects of speed in U.S. corporate bond markets, we use eligibility cutoffs that allow ``well-known seasoned issuers'' (WKSI) to accelerate issuances and reduce review time. After determining that this change initiated widespread adoption of covenants, we then examine the pricing, trading, and holding of these bonds and conclude that speed benefits investors and issuers instead of intermediaries. This finding stems from the inclusion of covenants, which can serve as substitutes for time-consuming due diligence. The speed-induced standardization of covenants also lowers underwriters' liability risk and attracts new investors.

Keywords: Raising Capital, Financial Innovation, Financial Intermediation, Fixed Income, Corporate Bonds, Contracting, Covenants, Primary Offerings, WKSI, Securities Offering Reform, Underwriting Quality, WorldCom Litigation, Liability Risk

JEL Classification: G3, G32, G2