Equity Price Discovery with Informed Private Debt

Abstract

Equity markets fail to account for value-relevant non-public information enjoyed by syndicated loan participants and reflected in publicly-posted loan prices. A long-short strategy that buys (sells) the equities of firms whose loans have recently appreciated (depreciated) earns large risk-adjusted returns, suggesting a surprising and economically important level of segmentation across the same firm's capital structure. The information lag captured by trading strategy returns is not affected by drivers of firm-specific attention, including publication of loan returns in the Wall Street Journal. Instead, returns to the strategy are eliminated among equities held by mutual funds that also trade in syndicated loans.

Keywords: Syndicated loans, private information, stock returns, return predictability, market integration

JEL Classification: G11, G12, G14, G21, G23