Equity Price Discovery with Informed Private Debt
66 Pages Posted: 15 Nov 2016 Last revised: 15 May 2018
Date Written: May 11, 2018
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 debt has recently appreciated (depreciated) earns monthly alphas of 1.4 to 2.2%. The strategy returns do not appear consistent with risk-based explanations, nor are they affected by drivers of firm-specific attention, including having loan returns publicly reported in the Wall Street Journal. Instead, when we condition on the subsample of equities held by mutual funds that 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