Private Information Disclosure in the Secondary Loan Market and its Impact on Equity Market Trading Costs

Abstract

When a firm’s loans are first traded in the secondary market, private information about the firm is disclosed to a select group of large investors, so called “Qualified Institutional Buyers” (QIBs). We document a significant information effect that benefits these buyers in the firm’s market for equity, in particular, a significant impact on equity market investors and the firm’s stock bid-ask spreads, which benefits informed QIBs relative to retail investors. This informational benefit gives rise to important regulatory issues relating to disclosure and SEC regulation.

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