Does Insider Trading around Loan Amendments Predict Stock Returns?

Abstract

This paper analyzes the effects of loan contract amendments and insider trading on stock returns. Loan renegotiations are frequent and contain potentially relevant information about the financial health of firms. Because managers and officers are better informed about the outcome of such renegotiations compared to other market participants, their trading behavior around loan renegotiations is likely to be informative about firms' financial situation. Using a large sample of loan amendments of US firms between 2001 and 2020, this paper shows that stock returns are 2.07% higher (0.65% lower) following a month with both insider purchases (sales) and a loan amendment. The findings suggest that insider trades provide valuable information to market participants about the outcome of loan renegotiations and the future prospects of firms.

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

JEL Classification: G32, G14