Is There Market Discipline for New Zealand Non-Bank Financial

Institutions? This paper studies effects of market discipline on the pricing of term deposit type investment products issued by New Zealand Non-Bank Financial Institutions (NBFIs) and how risk disclosure by NBFIs affects this relationship. While we find that more risky NBFIs indeed have to offer higher interest premiums, it is remarkable that investors do not appear to reward NBFIs for disclosure by accepting lower interest rates for better transparency. We attribute this unexpected result to possible limitations of a purely prospectus based disclosure quality index developed for this study or the inherent opaqueness of financial firms which cannot be overcome by even the best of disclosure (as argued by Morgan, 2002). The paper finally explores and partially confirms some predictions of the Cordella & Yeyati (1998) banking competition model which postulates that with better disclosure, financial firms will shift to quality competition, i.e. opt for lower risk strategies whereas non transparent markets foster pure price competition at the expense quality of individual financial firms