The Informational Efficiency of the Equity Market as Compared to the Syndicated Bank Loan Market

77 Pages Posted: 24 Aug 2004

See all articles by Linda Allen

Linda Allen

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Aron A. Gottesman

Pace University - Lubin School of Business - Department of Finance and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 2005

Abstract

The loan market is a hybrid between a public and a private market, comprised of financial institutions with access to private information about borrowing firms. We test whether this is reflected in informationally efficient price formation in the loan market vis a vis the equity markets, and reject this private information hypothesis. We also reject a liquidity hypothesis which suggests that equity markets always lead loan markets, despite bank lenders' access to private information, because of greater liquidity in equity markets. We further test, and reject, an asymmetric price reaction hypothesis that states that loan returns are more sensitive to negative information whereas equity returns respond symmetrically to both positive and negative information. We find evidence most consistent with an integrated markets hypothesis that suggests that both the equity and syndicated bank loan markets are highly integrated such that information flows freely across markets. This is particularly true when the equity market makers are also loan syndicate members.

Keywords: Informational efficiency, cointegration, Granger Causality, syndicated bank loans, equity

JEL Classification: G14

Suggested Citation

Allen, Linda and Gottesman, Aron A., The Informational Efficiency of the Equity Market as Compared to the Syndicated Bank Loan Market (September 2005). Pace University Finance Research Paper No. 2004/05. Available at SSRN: https://ssrn.com/abstract=580963 or http://dx.doi.org/10.2139/ssrn.580963

Linda Allen (Contact Author)

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

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HOME PAGE: http://stern.nyu.edu/~lallen

Aron A. Gottesman

Pace University - Lubin School of Business - Department of Finance and Economics ( email )

One Pace Plaza
New York, NY 10038
United States
212-346-1912 (Phone)
212-346-1573 (Fax)

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