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

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Author Info
Nils H. Hakansson
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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Paper provided by University of California at Berkeley in its series Research Program in Finance Working Papers with number RPF-287.

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Date of creation: 01 Jun 1999
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Handle: RePEc:ucb:calbrf:rpf-287

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Hayne E. Leland., 1998. "Agency Costs, Risk Management, and Capital Structure," Research Program in Finance Working Papers RPF-278, University of California at Berkeley. [Downloadable!]
    Other versions:
  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. [Downloadable!] (restricted)
  3. Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-60, December. [Downloadable!] (restricted)
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  4. Edward J. Kane, 1998. "Capital movements, asset values, and banking policy in globalized markets," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 482-501.
  5. Pomerleano, Michael, 1998. "The East Asia crisis and corporate finances : the untold micro story," Policy Research Working Paper Series 1990, The World Bank. [Downloadable!]
  6. 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. [Downloadable!] (restricted)
  7. Edward J. Kane, 1998. "Capital Movements, Asset Values, and Banking Policy in Globalized Markets," NBER Working Papers 6633, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  1. 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. [Downloadable!]
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