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 how much private lenders value their information advantage over bondholders 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 due to dualholder presence. 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 dualholder presence results in less information asymmetry and attracts more bondholders in the bond market. We conclude that lenders value their information advantage over bondholders 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