Price Discovery and Dissemination of Private Information by Loan Syndicate Participants

Journal of Accounting Research, Vol. 48 No. 5 December 2010

71 Pages Posted: 22 Mar 2009 Last revised: 7 Sep 2017

See all articles by Robert M. Bushman

Robert M. Bushman

University of North Carolina Kenan-Flagler Business School

Abbie J. Smith

University of Chicago - Booth School of Business

Regina Wittenberg Moerman

University of Southern California

Date Written: July 10, 2010

Abstract

We delineate key channels through which flows of confidential information to loan syndicate participants impact the dynamics of information arrival in prices. We isolate the timing of private information flows by estimating the speed of price discovery over quarterly earnings cycles in both secondary syndicated loan and equity markets. We identify borrowers disseminating private information to lenders relatively early in the cycle with firms exhibiting relatively early price discovery in the secondary loan market, documenting that price discovery is faster for loans subject to financial covenants, particularly earnings-based covenants, for borrowers who experience covenant violations, for borrowers with high credit risk, and for loans syndicated by relationship-based lenders or highly reputable lead arrangers. We then ask whether early access to private information in the loan market accelerates the speed of information arrival in stock prices. We document that the stock returns of firms identified with earlier private information dissemination to lenders indeed exhibit faster price discovery in the stock market, but only when institutional investors are involved in the firm’s syndicated loans. Further, the positive relation between institutional lending and the speed of stock price discovery is more pronounced in relatively weak public disclosure environments. These results are consistent with institutional lenders systematically exploiting confidential syndicate information via trading in the equity market.

Keywords: price discovery, syndicated loan market, private information in the loan market, institutional investors, earnings announcements, secondary loan market

JEL Classification: G10, G12, G14, G20, G21, M41

Suggested Citation

Bushman, Robert M. and Smith, Abbie J. and Wittenberg Moerman, Regina, Price Discovery and Dissemination of Private Information by Loan Syndicate Participants (July 10, 2010). Journal of Accounting Research, Vol. 48 No. 5 December 2010. Available at SSRN: https://ssrn.com/abstract=1364636

Robert M. Bushman

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-9809 (Phone)

HOME PAGE: http://public.kenan-flagler.unc.edu/faculty/bushmanr/

Abbie J. Smith

University of Chicago - Booth School of Business ( email )

1101 East 58th Street
Graduate School of Business
Chicago, IL 60637-1561
United States
773-702-7295 (Phone)
773-702-0458 (Fax)

Regina Wittenberg Moerman (Contact Author)

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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