From Implicit to Explicit: The Impact of Disclosure Requirements on Hidden Transaction Costs

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.

Earnings News and Over‐the‐Counter Markets

“…These findings demonstrate that earnings announcements help reduce search and bargaining costs and improve liquidity in the corporate bond market. Coefficients of the control variables in columns 1 and 2 are statistically significant and consistent with economic intuition and prior studies (e.g., Harris and Piwowar [2006], Cuny, Even-Tov, and Watts [2021]). 23 The economic magnitudes of our findings are also significant.…”

“…13 For instance, studies find a significant amount of informed trading around earnings announcements (e.g., Wei and Zhou [2016], Even-Tov [2017]). However, despite the fact that institutional investors are more likely to be informed, they will typically face lower transaction costs in OTC markets, due to their superior search and bargaining capabilities (e.g., Harris and Piwowar [2006], Green, Hollifield, and Schürhoff [2007b], Cuny, Even-Tov, and Watts [2021]). This finding contrasts with the dynamics of equity markets and inconsistent with theories based on asymmetric information (e.g., Kyle [1985], Easley and O'Hara [1987]).…”

“…These reductions are also economically meaningful in dollar terms. For example, the 5.52 22 Prior studies have shown these variables to be important determinants of bond liquidity (e.g., Harris and Piwowar [2006], Cuny [2018], Cuny, Even-Tov, and Watts [2021]). 23 Since the control variables mainly explain variation in bond liquidity across different bonds or larger time frames, most coefficients are statistically insignificant in our primary specification with bond-event fixed effects, which only captures variation within a short time frame for a single bond-event.…”

“…Next we clean the data to only retain trades that were executed in a normal OTC market environment, following prior studies (e.g., Bessembinder, Maxwell, and Venkataraman [2006], Even‐Tov [2017], Cuny, Even‐Tov, and Watts [2021]). We remove trades of privately issued and 144A bonds, which only qualified institutional investors can trade.…”

The Real Effects of Conflict Minerals Disclosures

“…First, they provide preliminary visual evidence documenting the effect of the conflict minerals disclosure rule. Second, they support the crucial assumption underlying the validity of our DiD estimation: that conflicts in covered countries and those in non-covered countries would have followed parallel trends in the rule's absence (Bertrand et al, 2004, Gow et al, 2016Cuny, Even-Tov, and Watts, 2021). All three panels of Figure 1 show that both the treatment group of covered countries and the control group of non-covered countries followed parallel trends in the pre-conflict minerals disclosure period.…”