Loan Renegotiation and Stock Returns: 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 renegotiations. The effects are stronger when the involved lenders have a high reputation, and when firms are closer to default and followed by few analysts. The findings suggest that insider trades reveal important private information of the parties involved in the renegotiation process to the market.

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

JEL Classification: G14, G21, G32