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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.

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.

Suggested Citation

  • Hakansson, Nils H., 1999. "The Role of a Corporate Bond Market in an Economy -- and in Avoiding Crises," Research Program in Finance, Working Paper Series qt6sq4c6g0, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley.
  • Handle: RePEc:cdl:rpfina:qt6sq4c6g0
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    References listed on IDEAS

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    1. Edward J. Kane, 1998. "Capital Movements, Asset Values, and Banking Policy in Globalized Markets," NBER Working Papers 6633, National Bureau of Economic Research, Inc.
    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. Pomerleano, Michael, 1998. "The East Asia crisis and corporate finances : the untold micro story," Policy Research Working Paper Series 1990, The World Bank.
    4. 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, September.
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    Cited by:

    1. Oke Michael O. & Dada Oluwabunmi & Aremo Nelson O., 2021. "Impact of Bond Market Development on the Growth of the Nigerian Economy," Folia Oeconomica Stetinensia, Sciendo, vol. 21(1), pages 60-75, June.
    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.
    3. World Bank & International Monetory Fund, 2001. "Developing Government Bond Markets : A Handbook," World Bank Publications - Books, The World Bank Group, number 13865, December.
    4. Sensarma, Rudra & Bhattacharyya, Indranil, 2016. "The impact of monetary policy on corporate bonds in India," Journal of Policy Modeling, Elsevier, vol. 38(3), pages 587-602.
    5. Ngene, Geoffrey M. & Lee Kim, Yea & Wang, Jinghua, 2019. "Who poisons the pool? Time-varying asymmetric and nonlinear causal inference between low-risk and high-risk bonds markets," Economic Modelling, Elsevier, vol. 81(C), pages 136-147.
    6. Yoko Furukawa, 2009. "Equity market and foreign capital," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 42(1), pages 349-358, February.
    7. Yoko Furukawa, 2009. "Equity market and foreign capital," Canadian Journal of Economics, Canadian Economics Association, vol. 42(1), pages 349-358, February.

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    More about this item

    Keywords

    G21; G28; G31; G32; G33; G34;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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