The Informational Advantage of Local Investors: Evidence from Fund Managers’ Trades Around Credit Events

61 Pages Posted: 19 Aug 2012 Last revised: 20 Jul 2015

See all articles by Natalie Oh

Natalie Oh

University of New South Wales (UNSW); Financial Research Network (FIRN)

Jerry T. Parwada

UNSW Australia Business School, School of Banking and Finance; UNSW Business School; Financial Research Network (FIRN)

Eric K. M. Tan

University of Queensland - Business School

Date Written: July 31, 2012

Abstract

We examine whether actively managed equity mutual funds trade on localised information events - syndicated loan covenant violations and changes in bank loan and entity ratings. Local investors achieve positive abnormal stock returns only around covenant violation periods rather than changes in credit ratings. Local investors appear to adjust their holdings at least three months prior to covenant violations. Mutual funds’ holdings of local stocks and stocks affected by covenant violations predict higher performance. Finally, to identify the possible information channel utilized by local investors, we find that local investors learn from insiders’ previous trades but not from their connection with syndicated loan network. Overall, our findings suggest that local investors have information advantages over distant counterparts due to their geography proximity to affected firms around credit events.

Keywords: covenant violations, credit ratings, institutional investors, private information

JEL Classification: G11, G14, G24, G34

Suggested Citation

Oh, Natalie and Parwada, Jerry T. and Tan, Eric K. M., The Informational Advantage of Local Investors: Evidence from Fund Managers’ Trades Around Credit Events (July 31, 2012). 25th Australasian Finance and Banking Conference 2012. Available at SSRN: https://ssrn.com/abstract=2131956 or http://dx.doi.org/10.2139/ssrn.2131956

Natalie Oh

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Jerry T. Parwada

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

UNSW
Sydney, NSW 2052
Australia

HOME PAGE: http://www.firn.org.au

Eric K. M. Tan (Contact Author)

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

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