Hidden in Plain Sight: Equity Price Discovery with Informed Private Debt
41 Pages Posted: 15 Nov 2016 Last revised: 31 May 2017
Date Written: May 29, 2017
This paper examines how private information is (or is not) transmitted via prices across markets for related claims on firm cash flows. We show that equity markets fail to account for value relevant non-public information enjoyed by syndicated loan participants and reflected in publicly posted loan prices. A strategy that buys the equities of firms whose debt has recently appreciated and sells the equities of firms whose loans have recently depreciated earns as much as 1.4 to 2.2% alpha per month. The strategy returns are unaffected when focusing on loan returns that are publicly reported in the Wall Street Journal. However, when we condition on the subsample of equities held by mutual funds which also trade in syndicated loans, returns to the strategy are eliminated.
Keywords: Syndicated loans, private information, stock returns, return predictability, market integration
JEL Classification: G11, G12, G14, G21, G23
Suggested Citation: Suggested Citation