Secondary Market Frictions and Real Firm Activity

Abstract

This article shows that secondary market structure and trading activity impact real firm activity. Using the staggered implementation of TRACE, we show that market transparency improvements lead to increased investment and show that greater illiquidity is associated with lower levels of investment. We also document two channels through which secondary markets impact real firm activity, access to and cost of capital. Specifically, we show that TRACE listing increases public bond issuance, decreases bank borrowing and equity issuances, and that higher illiquidity raises borrowing costs. Collectively, our findings provide a direct link between secondary market activity and the real economy.

Keywords: Debt Issuance, Liquidity, Price Discovery, Market Frictions, Market Microstructure, Real Effects, Investment

JEL Classification: G10, G12, G14, G32