Loan renegotiation and information diffusion: The role of insider trading

Abstract

This paper analyzes the effects of insider trading around loan renegotiations on stock returns. Using a large sample of loan renegotiations for publicly traded US firms, the paper shows that stock returns are 1.35% higher (0.85% lower) following months with both non-routine insider purchases (sales) and loan amendments. This effect is stronger when the involved lenders have a high quality, and for firms without credit rating, closer to default, and with more illiquid stocks. The findings suggest that insider trades are an important channel through which lenders' private information about the financial health of borrowers diffuses to market participants.

Keywords: Stock returns, Loan renegotiation, Insider trading, Information diffusion

JEL Classification: G14, G21, G32