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RFS Advance Access originally published online on July 1, 2006
Review of Financial Studies 2007 20(2):235-273; doi:10.1093/rfs/hhl020
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© The Author 2006. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org.

Transparency and Liquidity: A Controlled Experiment on Corporate Bonds

Michael A. Goldstein
Babson College

Edith S. Hotchkiss
Boston College

Erik R. Sirri
Babson College


  Abstract

This article reports the results of an experiment designed to assess the impact of last-sale trade reporting on the liquidity of BBB corporate bonds. Overall, adding transparency has either a neutral or a positive effect on liquidity. Increased transparency is not associated with greater trading volume. Except for very large trades, spreads on newly transparent bonds decline relative to bonds that experience no transparency change. However, we find no effect on spreads for very infrequently traded bonds. The observed decrease in transaction costs is consistent with investors’ ability to negotiate better terms of trade once they have access to broader bond-pricing data. (JEL codes: G14, G18, G23, G24, G28)


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