Private Information Dissemination in the Secondary Loan Market: The Effect on Stock Bid-ask Spreads

Abstract

We consider loans being marked to market to constitute new information that is only immediately available to large institutional traders, so-called qualified institutional buyers (QIBs). Smaller investors (non-QIBs) do not have instant access to such information. Investigating the effects of privileged information releases on bid-ask spreads of borrowing firms’ equity, we find a significant elevation in the level of information asymmetry that affects those spreads. Our paper reveals that private information dissemination in the secondary loan market affects the stock market information environment and yields benefits to large insiders with priority access to important information about the borrowing firms’ quality.

Keywords: Secondary loan market, Stock bid-ask spread, Institutional investors, Information asymmetry, Insider trading

JEL Classification: G14 G18 G23 D82