Institutional Stock Trading on Loan Market Information
55 Pages Posted: 18 Dec 2007 Last revised: 20 Feb 2010
Date Written: February 3, 2010
One of the most important developments in the corporate loan market over the past decade has been the growing participation of institutional investors. As lenders, institutional investors routinely receive private information about borrowers. However, most of these investors also trade in public securities. This leads to a controversial question: Do institutional investors use private information acquired in the loan market to trade in public securities? This paper examines the stock trading of institutional investors whose portfolios also hold loans. Using SEC filings of loan amendments, we identify institutional investors with access to private information disclosed during loan amendments. We then look at abnormal returns on subsequent stock trades. We find that institutional participants in loan renegotiations subsequently trade in the stock of the same company and outperform trades by other managers and trades in other stocks by approximately 5.4% in annualized terms.
Keywords: Institutional investors, Syndicated loans, Insider trading
JEL Classification: G11, G14, G21, G22, G23
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