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Journal of Economic PerspectivesVolume 22, Number 2Spring 2008 Pages 217-234 Markets Transparency and the Corporate Bond Market Hendrik Bessembinder...

Write a review of the article “Markets: Transparency and the Corporate Bond Market” by Hendrik Bessembinder & William Maxwell (Journal of Economic Perspectives, Vol. 22 Issue 2, p217-234.). In your own words explain the key points that the author was trying to communicate. Your review should be at least three page not counting the title or reference pages. I am uploading file of above article.
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Markets Transparency and the Corporate Bond Market Hendrik Bessembinder and William Maxwell This feature explores the operation of individual markets. Patterns of behavior in markets for speciFc goods and services offer lessons about the determinants and effects of supply and demand, market structure, strategic behavior, and govern- ment regulation. Suggestions for future columns and comments on past ones should be sent to James R. Hines Jr., JEP Co-Editor, at ^ [email protected] & or the Department of Economics, University of Michigan, 611 Tappan Street, Ann Arbor, MI 48109-1220. The U.S. Corporate Bond Market The U.S. corporate bond market is enormous. Outstanding principal in cor- porate bonds at the end of 2006 was $5.37 trillion, which as Table 1 shows was larger than either U.S. Treasury obligations or municipal bond obligations, though not quite as large as mortgage-related bonds. Corporate bonds are a principal source of external Fnancing for U.S. Frms; new corporate bond issues during 2006 amounted to $470 billion, up from $222 billion a decade earlier, as shown in Table 2. Table 2 reports issuances of “high yield” bonds, which are those with relatively poor credit ratings, and on “investment-grade” bonds, which are those with stronger credit ratings—a distinction discussed further below. During the decade 1997 to 2006, y Hendrik Bessembinder is A. Blaine Huntsman Chaired Presidential Professor, David Eccles School of Business, University of Utah, Salt Lake City, Utah. William Maxwell is Associate Professor of Finance, Eller College of Management, University of Arizona, Tucson, Arizona. Their e-mail addresses are ^ ±[email protected] & and ^ [email protected] & , respectively. Journal of Economic Perspectives—Volume 22, Number 2—Spring 2008—Pages 217–234
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U.S. corporations issued a total of $4.6 trillion in corporate bonds, compared to $1.5 trillion in equity raised through public common stock offerings. Table 2 reports public common stock offerings in two categories: “Initial Public Offerings” of common stock involve the sale of equity shares by companies without existing publicly traded shares, while “seasoned” offerings are new share sales by companies that previously issued shares to the public. For decades, corporate bonds primarily traded in an opaque environment. Quotations, which indicate prices at which dealers are willing to transact, were available only to market professionals, most often by telephone. Prices at which bond transactions were completed were not made public. In contrast, of course, most stock exchanges continuously disseminate quotations and also report trans- actions prices and quantities to the investing public within seconds of each trade. However, the U.S. corporate bond market underwent a fundamental change with the introduction of the Transaction Reporting and Compliance Engine (TRACE) in July 2002. Beginning that date, bond dealers were required to report all trades in publicly issued corporate bonds to the National Association of Security Dealers, which in turn made transaction data available to the public. While the introduction of transaction reporting through TRACE did not render the corporate bond markets as transparent as the stock markets, it nevertheless had far-reaching effects. The term “transparency” as applied to security markets refers to the amount and timeliness of the information provided to the investing public regarding market conditions. “Pre-trade transparency” refers to the dissemination of quota- tions or other indications of trading interest, while “post-trade transparency” refers to dissemination of information such as price and volume for completed trades. The pre-TRACE empirical evidence on the impact of transparency on quality of Table 1 Outstanding U.S. Bond Market Debt in 2006 ($ billions) Municipal 2,404.1 Treasury 4,322.9 Mortgage-related 6,492.4 Corporate debt 5,374.2 Federal agency securities 2,660.1 Money markets 4,007.5 Asset-backed 2,130.4 Total 27,391.6 Source: Securities Industry and Financial Markets Association (www.sif- ma.org) Note: “Treasury” includes interest-bearing marketable public debt. “Mortgage-related” includes Government National Mortgage Associ- ation (GNMA), Federal National Mortgage Association (FNMA), and Federal Home Loan Mortgage Corporation (FHLMC) mortgage- backed securities and collateralized mortgage obligations (CMOs) and private-label mortgage-backed securities/CMOs. “Money Markets” includes commercial paper and large time deposits. 218 Journal of Economic Perspectives
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