Market discipline in the banking industry: evidence from spread dispersion

Abstract

Do bond investors price hidden information? To address this question, we use a heteroscedastic regression model to empirically examine the factors affecting the spread dispersion unexplained by easy-to-observe issue characteristics (such as credit ratings, size, maturity, etc.). Two main results emerge from the empirical analysis. First, variables that accurately predict the spread of the typical bond lose their explanatory power for worse-rated, subordinated bonds with longer maturity and smaller face value. This result suggests that investors price hidden information. Secondly, unexplained spread dispersion increases for open-priced offers and decreases with the number of banks involved in the syndicate, indicating that primary market characteristics affect the investors’ ability to uncover hidden information.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 20 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.