Information and Liquidity of Over-the-Counter Securities: Evidence from Public Registration of Private Debt

44 Pages Posted: 1 Oct 2016 Last revised: 14 Jun 2017

See all articles by Song Han

Song Han

Federal Reserve Board - Division of Research and Statistics

Alan Guoming Huang

University of Waterloo

Madhu Kalimipalli

Lazaridis School of Business and Economics, Wilfrid Laurier University

Ke Wang

Board of Governors of the Federal Reserve System

Date Written: March 15, 2017

Abstract

The Rule 144A or non-bank private debt represents a significant and growing segment of the total U.S. bond market. A large fraction of 144A debt issues carry registration rights and are subsequently publicly registered. We examine the liquidity effects induced by enhanced information transparency of the registration. We document three key results. (a) Following public registration of 144A debt, dealer-specific bid-ask spreads improve, and more so for firms with higher ex-ante information asymmetry; (b) trading activities are subdued following public registration, based on both trading volume and frequency of trading, regardless of more retail investors entering the market; and (c) bond dealers tend to reduce their net positions following public registration of 144A bonds. Our results imply that public registration broadens market access for more investors and simultaneously enlarges the information set to all market participants thereby lowering transaction costs. More transparency may however discourage participation from institutional investors as they lose the privilege of uniquely accessing the market, generating private information or extracting rents from such privilege. This may in turn lead to dealers exiting their positions and thereby supplying liquidity to rest of the market.

Keywords: Rule 144A Debt, Bond Dealers, Public Registration, Liquidity, Information Asymmetry

JEL Classification: G14, G12

Suggested Citation

Han, Song and Huang, Alan G. and Kalimipalli, Madhu and Wang, Ke, Information and Liquidity of Over-the-Counter Securities: Evidence from Public Registration of Private Debt (March 15, 2017). Available at SSRN: https://ssrn.com/abstract=2846229 or http://dx.doi.org/10.2139/ssrn.2846229

Song Han

Federal Reserve Board - Division of Research and Statistics ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-736-1971 (Phone)
202-452-3891 (Fax)

Alan G. Huang (Contact Author)

University of Waterloo ( email )

School of Accounting and Finance
Waterloo, Ontario N2L 3G1
Canada
519-888 4567 ext. 36770 (Phone)

Madhu Kalimipalli

Lazaridis School of Business and Economics, Wilfrid Laurier University ( email )

Waterloo, Ontario N2L 3C5
Canada
519-884-0710 (Phone)

HOME PAGE: http://www.madhukalimipalli.com/

Ke Wang

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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