Does Insider Trading around Loan Amendments Predict Stock Returns?

Abstract

Corporate insiders are better informed about the outcome of loan renegotiations compared to market participants. Their trading in the company's stock around renegotiations is therefore informative about the firm’s financial situation. This paper shows for a large sample of loan amendments 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 for firms without credit rating, closer to default, and with more illiquid stocks. The findings suggest that insider trades are a channel through which lenders' information about the financial health of the firm affects asset prices.

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

JEL Classification: G14, G21, G32