Bank Debt Versus Bond Debt: Evidence from Secondary Market Prices
53 Pages Posted: 3 Jan 2005
Date Written: October 2006
This paper examines the price reaction of loans relative to bonds prior to and surrounding information intensive events, such as corporate (loan and bond) defaults, and bankruptcies using a unique dataset of daily secondary market prices of loans. Specifically, we find that risk-adjusted loan prices fall more than risk-adjusted bond prices prior to an event, and less than risk-adjusted bond prices of the same borrower during a short time period surrounding an event. This evidence is consistent with a monitoring advantage of loans over bonds. Our results are robust to a different empirical methodology (Vector Auto Regression based Granger causality), and to alternative explanations which control for security-specific characteristics, such as seniority, collateral, recovery rates, liquidity, covenants, and for multiple measures of cumulative abnormal returns.
Keywords: Bankruptcy, bonds, default, loans, monitoring, spillovers, stocks
JEL Classification: G14, G21, G22, G23, G24
Suggested Citation: Suggested Citation