IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

The role of information asymmetry and financial reporting quality in debt trading: Evidence from the secondary loan market

  • Wittenberg-Moerman, Regina
Registered author(s):

    I explore which firm and loan characteristics decrease or exacerbate information asymmetry in the trading of private debt. I find that loans of public firms, loans with an available credit rating, loans of profit firms and loans syndicated by more reputable arrangers are traded at lower bid-ask spreads, while revolvers, distressed loans and loans issued by institutional investors are associated with higher information costs. I also find that timely loss recognition reduces the bid-ask spread. This finding suggests that conservative reporting decreases information asymmetry regarding a borrower and increases the efficiency of the secondary trading of debt securities.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.sciencedirect.com/science/article/B6V87-4TCHKFY-1/2/fa856c43ea9359aec1893822216a5902
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal Journal of Accounting and Economics.

    Volume (Year): 46 (2008)
    Issue (Month): 2-3 (December)
    Pages: 240-260

    as
    in new window

    Handle: RePEc:eee:jaecon:v:46:y:2008:i:2-3:p:240-260
    Contact details of provider: Web page: http://www.elsevier.com/locate/jae

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Roychowdhury, Sugata & Watts, Ross L., 2007. "Asymmetric timeliness of earnings, market-to-book and conservatism in financial reporting," Journal of Accounting and Economics, Elsevier, vol. 44(1-2), pages 2-31, September.
    2. Rebecca S. Demsetz, 2000. "Bank Loan Sales: A New Look At The Motivations For Secondary Market Activity," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 23(2), pages 197-222, 06.
    3. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    4. Zhang, Jieying, 2008. "The contracting benefits of accounting conservatism to lenders and borrowers," Journal of Accounting and Economics, Elsevier, vol. 45(1), pages 27-54, March.
    5. Gary Gorton & Andrew Winton, 2002. "Financial Intermediation," NBER Working Papers 8928, National Bureau of Economic Research, Inc.
    6. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-81, July.
    7. Gary B. Gorton & Joseph G. Haubrich, . "The Loan Sales Market," Rodney L. White Center for Financial Research Working Papers 35-88, Wharton School Rodney L. White Center for Financial Research.
    8. Froot, Kenneth A. & Stein, Jeremy C., 1998. "Risk management, capital budgeting, and capital structure policy for financial institutions: an integrated approach," Journal of Financial Economics, Elsevier, vol. 47(1), pages 55-82, January.
    9. Asquith, Paul & Beatty, Anne & Weber, Joseph, 2005. "Performance pricing in bank debt contracts," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 101-128, December.
    10. Beatty, Anne & Weber, Joseph & Yu, Jeff Jiewei, 2008. "Conservatism and Debt," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 154-174, August.
    11. Hasbrouck, Joel, 1991. " Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March.
    12. Guay, Wayne & Verrecchia, Robert, 2006. "Discussion of an economic framework for conservative accounting and Bushman and Piotroski (2006)," Journal of Accounting and Economics, Elsevier, vol. 42(1-2), pages 149-165, October.
    13. Thomas, Hugh & Wang, Zhiqiang, 2004. "The integration of bank syndicated loan and junk bond markets," Journal of Banking & Finance, Elsevier, vol. 28(2), pages 299-329, February.
    14. Alexander, Gordon J. & Edwards, Amy K. & Ferri, Michael G., 2000. "The determinants of trading volume of high-yield corporate bonds," Journal of Financial Markets, Elsevier, vol. 3(2), pages 177-204, May.
    15. Acharya, Viral V & Pedersen, Lasse Heje, 2004. "Asset Pricing with Liquidity Risk," CEPR Discussion Papers 4718, C.E.P.R. Discussion Papers.
    16. Amir Sufi, 2007. "Information Asymmetry and Financing Arrangements: Evidence from Syndicated Loans," Journal of Finance, American Finance Association, vol. 62(2), pages 629-668, 04.
    17. Jonathan D. Jones & William W. Lang & Peter J. Nigro, 2005. "Agent Bank Behavior In Bank Loan Syndications," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 28(3), pages 385-402.
    18. Anne Beatty & Joseph Weber, 2006. "Accounting Discretion in Fair Value Estimates: An Examination of SFAS 142 Goodwill Impairments," Journal of Accounting Research, Wiley Blackwell, vol. 44(2), pages 257-288, 05.
    19. Yohn, Teri Lombardi, 1998. " Information Asymmetry around Earnings Announcements," Review of Quantitative Finance and Accounting, Springer, vol. 11(2), pages 165-82, September.
    20. Basu, Sudipta, 1997. "The conservatism principle and the asymmetric timeliness of earnings," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 3-37, December.
    21. Bharath, Sreedhar & Dahiya, Sandeep & Saunders, Anthony & Srinivasan, Anand, 2007. "So what do I get? The bank's view of lending relationships," Journal of Financial Economics, Elsevier, vol. 85(2), pages 368-419, August.
    22. Gorton, Gary B. & Pennacchi, George G., 1995. "Banks and loan sales Marketing nonmarketable assets," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 389-411, June.
    23. Ray Ball & Lakshmanan Shivakumar, 2006. "The Role of Accruals in Asymmetrically Timely Gain and Loss Recognition," Journal of Accounting Research, Wiley Blackwell, vol. 44(2), pages 207-242, 05.
    24. Sang Whi Lee & Donald J. Mullineaux, 2004. "Monitoring, Financial Distress, and the Structure of Commercial Lending Syndicates," Financial Management, Financial Management Association, vol. 33(3), Fall.
    25. Cebenoyan, A. Sinan & Strahan, Philip E., 2004. "Risk management, capital structure and lending at banks," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 19-43, January.
    26. Lee, Charles M C & Mucklow, Belinda & Ready, Mark J, 1993. "Spreads, Depths, and the Impact of Earnings Information: An Intraday Analysis," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 345-74.
    27. Diamond, Douglas W & Verrecchia, Robert E, 1991. " Disclosure, Liquidity, and the Cost of Capital," Journal of Finance, American Finance Association, vol. 46(4), pages 1325-59, September.
    28. Givoly, Dan & Hayn, Carla, 2000. "The changing time-series properties of earnings, cash flows and accruals: Has financial reporting become more conservative?," Journal of Accounting and Economics, Elsevier, vol. 29(3), pages 287-320, June.
    29. Nunn, Kenneth P. & Hill, Joanne & Schneeweis, Thomas, 1986. "Corporate Bond Price Data Sources and Return/Risk Measurement," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(02), pages 197-208, June.
    30. Goldstein, Michael A & Nelling, Edward F, 1999. "Market Making and Trading in Nasdaq Stocks," The Financial Review, Eastern Finance Association, vol. 34(1), pages 27-44, February.
    31. Smith, C.W. & Watts, R.L., 1992. "The Investment Oppotunity set and Corporate Financing, Dividend and Compensation Policies," Papers 92-02, Rochester, Business - Financial Research and Policy Studies.
    32. David Easley & Maureen O'hara, 2004. "Information and the Cost of Capital," Journal of Finance, American Finance Association, vol. 59(4), pages 1553-1583, 08.
    33. Katerina Simons, 1993. "Why do banks syndicate loans?," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 45-52.
    34. Ryan Lafond & Sugata Roychowdhury, 2008. "Managerial Ownership and Accounting Conservatism," Journal of Accounting Research, Wiley Blackwell, vol. 46(1), pages 101-135, 03.
    35. George Pennacchi, . "Loan Sales and the Cost of Bank Capital," Rodney L. White Center for Financial Research Working Papers 7-87, Wharton School Rodney L. White Center for Financial Research.
    36. Rajan, Raghuram G, 1998. "The Past and Future of Commercial Banking Viewed through an Incomplete Contract Lens," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 524-50, August.
    37. Christine Pavel & David Phillis, 1987. "Why commercial banks sell loans: an empirical analysis," Economic Perspectives, Federal Reserve Bank of Chicago, issue May, pages 3-14.
    38. Verrecchia, Robert E., 2001. "Essays on disclosure," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 97-180, December.
    39. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
    40. Sarig, Oded & Warga, Arthur, 1989. "Bond Price Data and Bond Market Liquidity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(03), pages 367-378, September.
    41. Christian Leuz, 2003. "IAS Versus U.S. GAAP: Information Asymmetry-Based Evidence from Germany's New Market," Journal of Accounting Research, Wiley Blackwell, vol. 41(3), pages 445-472, 06.
    42. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August.
    43. Ryan Ball & Robert M. Bushman & Florin P. Vasvari, 2008. "The Debt-Contracting Value of Accounting Information and Loan Syndicate Structure," Journal of Accounting Research, Wiley Blackwell, vol. 46(2), pages 247-287, 05.
    44. Dennis, Steven A. & Mullineaux, Donald J., 2000. "Syndicated Loans," Journal of Financial Intermediation, Elsevier, vol. 9(4), pages 404-426, October.
    45. Ilia D. Dichev, 2002. "Large-Sample Evidence on the Debt Covenant Hypothesis," Journal of Accounting Research, Wiley Blackwell, vol. 40(4), pages 1091-1123, 09.
    46. David Easley & Soeren Hvidkjaer & Maureen O'Hara, 2002. "Is Information Risk a Determinant of Asset Returns?," Journal of Finance, American Finance Association, vol. 57(5), pages 2185-2221, October.
    47. Glosten, Lawrence R. & Harris, Lawrence E., 1988. "Estimating the components of the bid/ask spread," Journal of Financial Economics, Elsevier, vol. 21(1), pages 123-142, May.
    48. Holthausen, Robert W. & Watts, Ross L., 2001. "The relevance of the value-relevance literature for financial accounting standard setting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 3-75, September.
    49. Ball, Ray & Shivakumar, Lakshmanan, 2005. "Earnings quality in UK private firms: comparative loss recognition timeliness," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 83-128, February.
    50. Lummer, Scott L. & McConnell, John J., 1989. "Further evidence on the bank lending process and the capital-market response to bank loan agreements," Journal of Financial Economics, Elsevier, vol. 25(1), pages 99-122, November.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:jaecon:v:46:y:2008:i:2-3:p:240-260. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.