Peer Effects of Price Transparency

65 Pages Posted: 14 May 2024

See all articles by Mahfuz Chy

Mahfuz Chy

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business

Jeffery Piao

University of Missouri at Columbia - School of Accountancy

Date Written: May 8, 2024

Abstract

We find that focal firms (i.e., firms without public bonds) are significantly less likely to issue management forecasts when investors can observe peer firms’ bond price signals in the TRACE platform. The evidence suggests that information in peers’ bond prices mitigates investor uncertainty about focal firms’ economic conditions, dampening focal firms’ incentives to issue management forecasts. In cross-sectional tests, we find that the effect is more pronounced when focal firms have greater economic commonalities with peer firms, when peers’ bond prices are more informative about focal firms’ economic conditions, when focal firms’ management forecasts are less reliable, and when focal firms’ investors can glean less information from the stock market. The effect is weaker when litigation risk and equity issuance motive dominate, that is, when the marginal cost of not issuing forecasts is high. We also show that stock market reactions to management forecasts decrease significantly when peers’ bond prices become observable via TRACE, indicating that focal firms internalize fewer valuation benefits from issuing management forecasts in the post-TRACE regime. Finally, in contrast to the results on management forecasts, we find that focal firms increase qualitative disclosures via 8-K filings and press releases. To the best of our knowledge, our study provides the first set of evidence on the peer effects of the secondary corporate bond market.

Keywords: Management Forecast, TRACE, Peer Effect, Disclosure, Market Prices, Transparency, Bond Market

JEL Classification: G10, G14, D47, D89, M40, M41

Suggested Citation

Chy, Mahfuz and Piao, Jeffery, Peer Effects of Price Transparency (May 8, 2024). Available at SSRN: https://ssrn.com/abstract=4823172 or http://dx.doi.org/10.2139/ssrn.4823172

Mahfuz Chy (Contact Author)

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business ( email )

331 Cornell Hall
Columbia, MO 65211
United States

Jeffery Piao

University of Missouri at Columbia - School of Accountancy ( email )

340 Cornell Hall
Columbia, MO 65211
United States

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