The Informational Efficiency of the Equity Market as Compared to the Syndicated Bank Loan Market

47 Pages Posted: 3 Nov 2008

See all articles by Linda Allen

Linda Allen

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Aron A. Gottesman

Pace University - Lubin School of Business - Department of Finance and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 2004

Abstract

To our knowledge, this is the first paper to examine the informational efficiency of the equity market as compared to the syndicated bank loan market. The loan market is a private market comprised of financial institutions with access to private information. We test whether this isreflected in informationally efficient price formation in the loan market vis a vis the equity markets, and reject this private information hypothesis. We find support for a liquidity hypothesis, suggesting that equity markets lead loan markets, despite bank lenders access to private information, because of greater liquidity in equity markets. Only when equity markets arerelatively illiquid do we find evidence supporting the private information hypothesis. Finally, we find evidence of abnormal returns if portfolios are constructed using lagged equity returns todesignate investments in the syndicated bank loan market.

Suggested Citation

Allen, Linda and Gottesman, Aron A., The Informational Efficiency of the Equity Market as Compared to the Syndicated Bank Loan Market (August 2004). NYU Working Paper No. FIN-04-017; Pace University Finance Research Paper No. 2008/05. Available at SSRN: https://ssrn.com/abstract=1294452 or http://dx.doi.org/10.2139/ssrn.1294452

Linda Allen

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States
646-312-3463 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://stern.nyu.edu/~lallen

Aron A. Gottesman

Pace University - Lubin School of Business - Department of Finance and Economics ( email )

One Pace Plaza
New York, NY 10038
United States
212-346-1912 (Phone)
212-346-1573 (Fax)

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