Unlike equities, corporate debt claims are currently mostly traded in over-the-counter (OTC) markets. Since the OTC nature of the market decreases price transparency, increases transaction costs, and increases the time it takes to find a matching counterparty for a trade, there is a fundamental economic question as to why an apparently imperfect matching technology (OTC trade) can arise in equilibrium when a better matching technology (organized exchanges) exists. This is puzzling because some corporate debt claims actually used to be traded on exchanges in the early 20th century, and important because the structure of this large market has important knock on effects: on who can participate in markets, on how claims are structured (in particular in terms of their maturity) and also how firms finance themselves. In the context of models that build on search theory, this project will explore potential mechanisms that explain 1) what drives the structure of secondary markets for corporate debt, and 2) how this affects firm financing decisions, in particular, debt maturity choice, and 3) what the policy implications are for regulation.
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