Is the Playing Field Really Level? Evidence from Bond-loan Dualholding

Abstract

Using a novel phenomenon of bondholders on lending syndicates (i.e., bond-loan dualholding), this paper examines whether and how much lenders value their information advantage when borrowers have on-going access to bond markets. We first show that loans issued to borrowers with bond-loan dualholders have spreads that are 6% higher than those without, suggesting that lenders ask for compensation in terms of higher spreads for concerns over losing their information advantage via dualholding. For identification, we use financial institution mergers that result in the formation of bond-loan dualholders and examine its effect on loan spreads. Using data on loan amendments and bondholder trading, we show that dualholding bondholders’ informed trading around major corporate events could be one important channel through which lenders’ private information is disseminated to bond markets. Additional analysis using the implementation of the Volcker Rule provides corroborative evidence on the channel. Finally, we show that the presence of dualholders results in less information asymmetry and low bondholder concentration in the bond market with implications for corporate financial policy. We conclude that lenders value their information advantage over bondholders even in seemingly transparent borrowers and price in the potential loss of such advantage during the loan contracting process.

Keywords: Bond-loan dualholders; information advantage, information spillover, loan spreads, loan amendments, informed trading

JEL Classification: G20, G32