Information asymmetry and bank regulation: Can the spread of debt contracts be explained by recovery rates?Wenchien Liu, Peter Miu, Yuanchen Chang and Bogie Ozdemir Journal of Financial Intermediation, 2012, vol. 21, issue 1, 123-150 Abstract: We investigate whether the spread of corporate debt contacts can be explained by their ultimate recovery rates. Using the actual realized recovery rates of defaulted debt instruments issued in the US from 1962 to 2007, we find that recovery rate is reflected in the spread at issuance, and that this relationship has become more significant since commercial banks were allowed to underwrite corporate securities. Our further investigation indicates that the enhanced informativeness of recovery rate can be attributed to the lowering of information asymmetry of individual firms. Besides, the relation between the spread at issuance and the recovery rate is stronger for weak corporate governance and non-investment grade issuers. Our conclusions are found to be robust to endogeneity issues, potentially omitted variables and alternative model specifications. Keywords: Recovery rate; Information asymmetry; Bank regulation; Corporate governance; Credit rating; Glass–Steagall Act; Financial Modernization Act (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:21:y:2012:i:1:p:123-150 DOI: 10.1016/j.jfi.2011.07.001 Access Statistics for this article Journal of Financial Intermediation is currently edited by Elu von Thadden More articles in Journal of Financial Intermediation from Elsevier |
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