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Institutional stock trading on loan market information

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  • Ivashina, Victoria
  • Sun, Zheng

Abstract

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 the Securities and Exchange Commission 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.

Suggested Citation

  • Ivashina, Victoria & Sun, Zheng, 2011. "Institutional stock trading on loan market information," Journal of Financial Economics, Elsevier, vol. 100(2), pages 284-303, May.
  • Handle: RePEc:eee:jfinec:v:100:y:2011:i:2:p:284-303
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    References listed on IDEAS

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    Cited by:

    1. Bodnaruk, Andriy & Rossi, Marco, 2016. "Dual ownership, returns, and voting in mergers," Journal of Financial Economics, Elsevier, vol. 120(1), pages 58-80.
    2. repec:bla:acctfi:v:57:y:2017:i:1:p:289-315 is not listed on IDEAS
    3. Norden, Lars, 2017. "Information in CDS spreads," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 118-135.
    4. Benmelech, Efraim & Dlugosz, Jennifer & Ivashina, Victoria, 2012. "Securitization without adverse selection: The case of CLOs," Journal of Financial Economics, Elsevier, vol. 106(1), pages 91-113.
    5. Henk Berkman & Michael McKenzie & Patrick Verwijmeren, 2013. "Hole in the Wall: Informed Short Selling ahead of Private Placements," Tinbergen Institute Discussion Papers 13-153/IV/DSF62, Tinbergen Institute.
    6. repec:eee:quaeco:v:66:y:2017:i:c:p:265-274 is not listed on IDEAS
    7. Bernile, Gennaro & Sulaeman, Johan & Wang, Qin, 2015. "Institutional trading during a wave of corporate scandals: “Perfect Payday”?," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 191-209.
    8. Li, Xiaoyang & Lin, Shannon & Tucker, Alan L., 2016. "The curious case of converts," Global Finance Journal, Elsevier, vol. 31(C), pages 1-17.
    9. Michael R. Roberts, 2014. "The Role of Dynamic Renegotiation and Asymmetric Information in Financial Contracting," NBER Working Papers 20484, National Bureau of Economic Research, Inc.
    10. Paul A. Griffin & David H. Lont & Kate McClune, 2014. "Insightful Insiders? Insider Trading and Stock Return around Debt Covenant Violation Disclosures," Abacus, Accounting Foundation, University of Sydney, vol. 50(2), pages 117-145, June.
    11. repec:eee:jaecon:v:64:y:2017:i:2:p:313-339 is not listed on IDEAS
    12. repec:eee:jaecon:v:64:y:2017:i:2:p:340-345 is not listed on IDEAS
    13. Roberts, Michael R., 2015. "The role of dynamic renegotiation and asymmetric information in financial contracting," Journal of Financial Economics, Elsevier, vol. 116(1), pages 61-81.
    14. Fecht, Falko & Hackethal, Andreas & Karabulut, Yigitcan, 2013. "Is proprietary trading detrimental to retail investors?," Discussion Papers 42/2013, Deutsche Bundesbank.
    15. Kedia, Simi & Zhou, Xing, 2014. "Informed trading around acquisitions: Evidence from corporate bonds," Journal of Financial Markets, Elsevier, vol. 18(C), pages 182-205.
    16. Daniel Streitz, 2015. "The Impact of Credit Default Swap Trading on Loan Syndication," SFB 649 Discussion Papers SFB649DP2015-012, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    17. Vikas Agarwal & Costanza Meneghetti, 2011. "The role of hedge funds as primary lenders," Review of Derivatives Research, Springer, vol. 14(2), pages 241-261, July.
    18. Pereira da Silva, Paulo & Vieira, Isabel & Vieira, Carlos, 2015. "M&A operations: Further evidence of informed trading in the CDS market," Journal of Multinational Financial Management, Elsevier, vol. 32, pages 116-130.
    19. Bergbrant, Mikael C. & Bradley, Daniel & Hunter, Delroy M., 2017. "Does bank loan supply affect the supply of equity capital? Evidence from new share issuance and withdrawal," Journal of Financial Intermediation, Elsevier, vol. 29(C), pages 32-45.

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