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The Role of a Corporate Bond Market in an Economy -- and in Avoiding Crises

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  • Hakansson, Nils H.
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    Abstract

    While much attention has been focused on the optimal ratio of a firm's debt to equity, the "optimal" or best balance between bond financing and (longer-term) bank financing has scarcely been addressed. This essay examines the principal differences between an economy with a well-developed corporate bond market free from government interference and an economy in which bank financing plays a central role (as in East Asia). When a full-fledged corporate bond market is present, market forces have a much greater opportunity to assert themselves, thereby reducing systemic risk and the probability of a crisis. This is because such an environment is associated with greater accounting transparency, a large community of financial analysts, respected rating agencies, a wide range of corporate debt securities and derivatives demanding sophisticated credit analysis, and efficient procedures for corporate reorganization and liquidation. In addition, the richness of available securities will tend to enhance economic welfare, and the market forces at work on the wide array of bond prices are likely to have a strong spillover effect on the health of the banking system as well.

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    Bibliographic Info

    Paper provided by Research Program in Finance, Institute for Business and Economic Research, UC Berkeley in its series Research Program in Finance, Working Paper Series with number qt6sq4c6g0.

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    Date of creation: 01 Jun 1999
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    Handle: RePEc:cdl:rpfina:qt6sq4c6g0

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    Keywords: G21; G28; G31; G32; G33; G34;

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    1. Dennis Emerick & William White, 1992. "The Case For Private Placements: How Sophisticated Investors Add Value To Corporate Debt Issuers," Journal of Applied Corporate Finance, Morgan Stanley, vol. 5(3), pages 83-91.
    2. Hakansson, Nils H, 1982. " Changes in the Financial Market: Welfare and Price Effects and the Basic Theorems of Value Conservation," Journal of Finance, American Finance Association, vol. 37(4), pages 977-1004, September.
    3. Edward J. Kane, 1998. "Capital Movements, Asset Values, and Banking Policy in Globalized Markets," NBER Working Papers 6633, National Bureau of Economic Research, Inc.
    4. Pomerleano, Michael, 1998. "The East Asia crisis and corporate finances : the untold micro story," Policy Research Working Paper Series 1990, The World Bank.
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    Cited by:
    1. World Bank & International Monetory Fund, 2001. "Developing Government Bond Markets : A Handbook," World Bank Publications, The World Bank, number 13865, August.
    2. Richard J. Herring & Nathporn Chatusripitak, 2000. "The Case of the Missing Market: The Bond Market and Why It Matters for Financial Development," Center for Financial Institutions Working Papers 01-08, Wharton School Center for Financial Institutions, University of Pennsylvania.

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