Informed Bank Debt and Stock Returns
American Economic Association Meetings
Posted: 22 Apr 2020 Last revised: 1 Jun 2021
Date Written: August 1, 2019
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: Suggested Citation