Institutional Stock Trading on Loan Market Information
Harvard University; National Bureau of Economic Research (NBER)
University of California, Irvine - Paul Merage School of Business
February 3, 2010
AFA 2008 New Orleans Meetings Paper
EFA 2007 Ljubljana Meetings
One of the most important developments in the corporate loan market over the past decade has been the growing participation of institutional investors. As lenders, institutional investors routinely receive private information about borrowers. However, most of these investors also trade in public securities. This leads to a controversial question: Do institutional investors use private information acquired in the loan market to trade in public securities? This paper examines the stock trading of institutional investors whose portfolios also hold loans. Using SEC filings of loan amendments, we identify institutional investors with access to private information disclosed during loan amendments. We then look at abnormal returns on subsequent stock trades. We find that institutional participants in loan renegotiations subsequently trade in the stock of the same company and outperform trades by other managers and trades in other stocks by approximately 5.4% in annualized terms.
Number of Pages in PDF File: 55
Keywords: Institutional investors, Syndicated loans, Insider trading
JEL Classification: G11, G14, G21, G22, G23
Date posted: December 18, 2007 ; Last revised: February 20, 2010
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