Why Does Secondary Market Transparency Improve Corporate Bond Issuing Costs

Using the staggered implementation of the Trade Reporting and Compliance Engine (TRACE) as a natural experiment, we show that bonds issued in a transparent environment receive higher prices (or equivalently pay lower yield spreads to benchmark US treasury bonds) relative to control bonds issued in the opaque, pre-TRACE environment. The yield spread on a typical pre-TRACE issuance of 132bps falls by 12bps following implementation of TRACE. We do not detect a significant effect on underpricing or fees and expenses paid in the issuing process. The main driver of the reduction in the cost of capital for bond issuers is the mitigation of information asymmetry rather than improved liquidity in the secondary market.