Information acquisition costs and credit spreads

Abstract

This paper investigates the relevance of information acquisition costs for corporate bond spreads. We exploit the staggered introduction of the SEC’s EDGAR database and its XBRL initiative to show that these costs matter: Lower information acquisition costs are associated with a decline in credit spreads at the onset of both initiatives. Our results are stronger for bonds that are associated with higher information uncertainty. We also show that bond liquidity is an important channel through which lowering information acquisition costs affects credit spreads. We document a decline in the non-default component in spreads and a positive impact on transaction cost measures and trading volume following the introduction of XBRL.