The Role of a Corporate Bond Market in an Economy--and in Avoiding Crises

Nils H. Hakansson

China Accounting and Finance Review, 1, No. 1, March 1999, 105-114 (Chinese version 98-104); summary in Japanese by Nomura Research Institute.

Abstract
While much attention has been focused on the optimal ratio of a firm's debt to equity, the 'optimal' or best balance between bond financing and (long-term) bank financing has scarcely been addressed. This article examines the principal differences between an economy with a well-developed corporate bond market free from government interference and an economy in which bank financing plays a central role (as in East Asia). When a full-fledged corporate bond market in present, market forces have a much greater opportunity to assert themselves, thereby reducing systemic risk and the probability of a crisis. This is because such an environment is associated with greater accounting transparency, a large community of financial analysts, respected rating agencies, a wide range of corporate debt securities and derivatives demanding sophisticated credit analysis, and efficient procedures for corporate reorganization and liquidation. In addition, the richness of available securities will tend to enhance economic welfare, and the market forces at work on the wide array of bond prices are likely to have a strong spillover effect on the health of the banking system as well.

Keywords: corporate bond, bond market, financial crisis, bond financing

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