Loan Ownership and Liquidity in the Secondary Loan Market

Abstract

We find some support for theories predicting that the presence of informed investors adversely affects liquidity: When arrangers retain a share in the loan this impacts negatively liquidity. We find strong evidence that investor diversity is beneficial to liquidity: Loans with larger syndicates; syndicates with higher investor turnover, more investor types, and lower investor-types’ loan share concentration have lower bid-ask spreads. These findings are robust and do not appear to be driven by investors’ borrower/loan selection. We find that not all investors contribute positively to loan liquidity. While an increase in the number of hedge funds in a syndicate lowers the loan’s bid-ask spread, an increase in the number of banks in the syndicate has the opposite effect, consistent with existing beliefs that asset managers are active traders but banks follow buy-and-hold investment strategies.

Keywords: Loan Syndicate, Investor Diversity, Informed Investors, Loan Market Liquidity

JEL Classification: G14, G21, G22, G23, G24