Price Discovery and Dissemination of Private Information by Loan Syndicate Participants

We delineate key channels through which flows of confidential information to loan syndicate participants impact the dynamics of information arrival in prices. We isolate the timing of private information flows by estimating the speed of price discovery over quarterly earnings cycles in both secondar...

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Bibliographic Details
Published in:Journal of accounting research 2010-12, Vol.48 (5), p.921-972
Main Authors: BUSHMAN, ROBERT M., SMITH, ABBIE J., WITTENBERG-MOERMAN, REGINA
Format: Article
Language:English
Subjects:
Borrowing
Credit risk
Equity
Financial information
Financial portfolios
Information sharing
Institutional investors
Investors
Lenders
Loans
Market prices
Participating loans
Price discovery
Price models
Prices
Securities markets
Stock markets
Stock prices
Stock returns
Studies
Syndicates
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Summary:We delineate key channels through which flows of confidential information to loan syndicate participants impact the dynamics of information arrival in prices. We isolate the timing of private information flows by estimating the speed of price discovery over quarterly earnings cycles in both secondary syndicated loan and equity markets. We identify borrowers disseminating private information to lenders relatively early in the cycle with firms exhibiting relatively early price discovery in the secondary loan market, documenting that price discovery is faster for loans subject to financial covenants, particularly earnings-based covenants; for borrowers who experience covenant violations; for borrowers with high credit risk; and for loans syndicated by relationshipbased lenders or highly reputable lead arrangers. We then ask whether early access to private information in the loan market accelerates the speed of information arrival in stock prices. We document that the stock returns of firms identified with earlier private information dissemination to lenders indeed exhibit faster price discovery in the stock market, but only when institutional investors are involved in the firm's syndicated loans. Further, the positive relation between institutional lending and the speed of stock price discovery is more pronounced in relatively weak public disclosure environments. These results are consistent with institutional lenders systematically exploiting confidential syndicate information via trading in the equity market.
ISSN:0021-8456
1475-679X
DOI:10.1111/j.1475-679X.2010.00384.x