Information and Liquidity of Over-The-Counter Securities: Evidence from Public Registration of Private Debt

Abstract

The Rule 144A or non-bank private debt represents a significant and growing segment of the total U.S. bond market. A large fraction of 144A debt issues carry registration rights and are subsequently publicly registered. We examine the liquidity effects induced by enhanced information transparency of the registration. We document three key results. (a) Following public registration of 144A debt, dealer-specific bid-ask spreads improve, and more so for firms with higher ex-ante information asymmetry; (b) trading activities are subdued following public registration, based on both trading volume and frequency of trading, regardless of more retail investors entering the market; and (c) bond dealers tend to reduce their net positions following public registration of 144A bonds. Our results imply that public registration broadens market access for more investors and simultaneously enlarges the information set to all market participants thereby lowering transaction costs. More transparency may however discourage participation from institutional investors as they lose the privilege of uniquely accessing the market, generating private information or extracting rents from such privilege. This may in turn lead to dealers exiting their positions and thereby supplying liquidity to rest of the market.