The effect of market transparency on corporate disclosure

Abstract

Market prices and trading in financial markets are important information signals that reveal firm specific information to the public. I study how the observability of such prices and trading (hereafter, "market transparency") affects firms' disclosure incentives. I exploit the staggered introduction of TRACE, which made bond prices and transactions publicly observable, and show that firms provide more guidance when their bonds' prices and trading become observable. This effect is stronger for firms with informationally sensitive bonds and firms without exchange-listed bonds prior to TRACE. Also, firms become particularly more likely to disclose bad news, consistent with the notion that investors' access to market information limits managers' incentives to withhold information. I corroborate my results using (1) a small controlled experiment, in which prices and trading are revealed for a randomized set of bonds, and (2) threshold rules used by the regulator. Taken together, my results suggest that observable market outcomes inform investors not only directly, by aggregating and revealing investors' information and beliefs, but also indirectly by increasing corporate disclosure.