Secondary Market Frictions and Real Firm Activity
56 Pages Posted: 20 Apr 2017 Last revised: 6 Jan 2020
Date Written: Dec 15, 2019
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
Suggested Citation: Suggested Citation