Informational Efficiency of Loans Versus Bonds: Evidence from Secondary Market Prices

48 Pages Posted: 11 Nov 2008

See all articles by Edward I. Altman

Edward I. Altman

New York University (NYU) - Salomon Center; New York University (NYU) - Department of Finance

Amar Gander

affiliation not provided to SSRN

Anthony Saunders

New York University - Leonard N. Stern School of Business

Date Written: February 2004

Abstract

This paper examines the informational efficiency of loans relative to bonds surrounding loan default dates and bond default dates. We examine this issue using a unique dataset of daily secondary market prices of loans over the 11/1999-06/2002 period. We find evidence consistent with a monitoring role of loans. Specifically, consistent with a view that the monitoring role of loans should be reflected in more precise expectations embedded in loan prices, we find that the price decline of loans is less adverse than that of bonds of the same borrower around loan and bond default dates. Additionally, we find evidence that the difference in price decline of loans versus bonds is amplified around loan default dates that are not preceded by a bond default date of the same company. Our results are robust to several alternative explanations, and to controlling for security-specific characteristics, such as seniority, collateral, covenants, and for multiple measures of cumulative abnormal returns. Overall, we find that the loan market is informationally more efficient than the bond market around loan default dates and bond default dates.

Keywords: Words: monitoring, default, spillovers, event study, loans, bonds, stocks

Suggested Citation

Altman, Edward I. and Gander, Amar and Saunders, Anthony, Informational Efficiency of Loans Versus Bonds: Evidence from Secondary Market Prices (February 2004). NYU Working Paper No. S-FI-04-02, Available at SSRN: https://ssrn.com/abstract=1297736

Edward I. Altman (Contact Author)

New York University (NYU) - Salomon Center ( email )

44 West 4th Street
New York, NY 10012
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212-998-0709 (Phone)
212-995-4220 (Fax)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Amar Gander

affiliation not provided to SSRN

No Address Available

Anthony Saunders

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

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