Informed Bank Debt and Stock Returns

American Economic Association Meetings

Posted: 22 Apr 2020 Last revised: 1 Jun 2021

See all articles by Lifeng Gu

Lifeng Gu

The University of Hong Kong

Bing Han

University of Toronto, Rotman School of Management

Tong Li

The University of Hong Kong

Date Written: August 1, 2019

Abstract

This paper documents novel evidence that private debt contains value-relevant nonpublic information with significant economic value. We extract banks' private information from term loan spreads. Abnormal loan spreads significantly predict firms' future operating performance and uncertainty measures. Equity analysts and investors are not privy to banks' private information. Firms with higher abnormal loan spreads experience more negative earnings surprises over the next several quarters. Their stocks underperform on average by about 0.5% per month with no reversals in longer horizons. This result is concentrated among loans associated with better borrower-lender relationship, indicating that relationship banking facilitates valuable information acquisition. The abnormal loan spreads also negatively predict stock returns of borrowers' peer firms.

Keywords: nonpublic information, term loans, relationship banking, stock returns

JEL Classification: G12, G20

Suggested Citation

Gu, Lifeng and Han, Bing and Li, Tong, Informed Bank Debt and Stock Returns (August 1, 2019). American Economic Association Meetings, Available at SSRN: https://ssrn.com/abstract=3552133

Bing Han

University of Toronto, Rotman School of Management ( email )

Toronto, Ontario M5S 3E6
Canada
4169460732 (Phone)

Tong Li

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

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