From implicit to explicit: The impact of disclosure requirements on hidden transaction costs

55 Pages Posted: 30 Jun 2019 Last revised: 8 Oct 2020

See all articles by Christine Cuny

Christine Cuny

New York University (NYU) - Leonard N. Stern School of Business

Omri Even-Tov

Haas School of Business - UC Berkeley

Edward M. Watts

Yale School of Management

Date Written: October 7, 2020

Abstract

This paper provides evidence that disclosing corporate bond investors' transaction costs (markups) affects the size of the markups. Until recently, markups were embedded in the reported transaction price and not explicitly disclosed. Without explicit disclosure, investors can estimate their markups using executed transaction prices. However, estimating markups imposes information processing costs on investors, potentially creating information asymmetry between unsophisticated investors and bond-market professionals. We explore changes in markups after bond-market professionals were required to explicitly disclose the markup on certain retail trade confirmations. We find that markups decline for trades that are subject to the disclosure requirement relative to those that are not. The findings are pronounced when constraints on investors' information processing capacity limit their ability to be informed about their markups without explicit disclosure.

Keywords: Corporate bonds; Retail transaction costs; Information processing costs; Information asymmetry; Disclosure regulation; Financial advisers

JEL Classification: G24, G28, D82, D83

Suggested Citation

Cuny, Christine and Even-Tov, Omri and Watts, Edward, From implicit to explicit: The impact of disclosure requirements on hidden transaction costs (October 7, 2020). NYU Stern School of Business, Available at SSRN: https://ssrn.com/abstract=3393747 or http://dx.doi.org/10.2139/ssrn.3393747

Christine Cuny

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Ste. 10-91
New York, NY NY 10012
United States
212-998-0423 (Phone)

Omri Even-Tov (Contact Author)

Haas School of Business - UC Berkeley ( email )

Haas School of Business
Berkeley, CA 94720
United States
3104302236 (Phone)

Edward Watts

Yale School of Management ( email )

165 Whitney Ave
New Haven, CT 06511

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