Corporate Transparency and Bond Liquidity

To answer the question what causes an asset to be illiquid, we analyze the impact that transparency of corporate accounting information has on the liquidity of its traded bonds. In particular, we focus on how this relationship depends on aggregate liquidity and the financial state of the firm. We use an extensive panel data set comprising more than 40,000 quarterly bond observations between 2004Q4 and 2012Q4. We find a statistically and economically significant impact of transparency on bond liquidity. This relationship becomes stronger during times of financial distress. We also find that the impact of transparency on liquidity is much larger than the influence of credit risk. Finally, we also find that transparent accounting information has a strong effect on liquidity risk.