IDEAS home Printed from https://ideas.repec.org/a/eee/finmar/v67y2024ics1386418123000654.html
   My bibliography  Save this article

Private information disclosure in the secondary loan market and its impact on equity market trading costs

Author

Listed:
  • Saunders, Anthony
  • Shao, Pei
  • Xiao, Yuchao

Abstract

When a firm's loans are first traded in the secondary market, private information about the firm is disclosed to a select group of large investors, so-called qualified institutional buyers (QIBs). We document a significant information effect that benefits these buyers in the firm's market for equity, in particular, a significant impact on equity market investors and the firm's stock bid-ask spreads, which benefits informed QIBs relative to retail investors. This informational benefit raises important regulatory issues related to disclosure and SEC regulations.

Suggested Citation

  • Saunders, Anthony & Shao, Pei & Xiao, Yuchao, 2024. "Private information disclosure in the secondary loan market and its impact on equity market trading costs," Journal of Financial Markets, Elsevier, vol. 67(C).
    • Handle: RePEc:eee:finmar:v:67:y:2024:i:c:s1386418123000654
    DOI: 10.1016/j.finmar.2023.100867
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1386418123000654
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.finmar.2023.100867?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Jawad M Addoum & Justin R Murfin & Itay Goldstein, 2020. "Equity Price Discovery with Informed Private Debt," The Review of Financial Studies, Society for Financial Studies, vol. 33(8), pages 3766-3803.
    2. Coller, M & Yohn, TL, 1997. "Management forecasts and information asymmetry: An examination of bid-ask spreads," Journal of Accounting Research, Wiley Blackwell, vol. 35(2), pages 181-191.
    3. Lee, Charles M C & Mucklow, Belinda & Ready, Mark J, 1993. "Spreads, Depths, and the Impact of Earnings Information: An Intraday Analysis," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 345-374.
    4. Cai, Jian & Eidam, Frederik & Saunders, Anthony & Steffen, Sascha, 2018. "Syndication, interconnectedness, and systemic risk," Journal of Financial Stability, Elsevier, vol. 34(C), pages 105-120.
    5. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    6. John M. Griffin & Jin Xu, 2009. "How Smart Are the Smart Guys? A Unique View from Hedge Fund Stock Holdings," The Review of Financial Studies, Society for Financial Studies, vol. 22(7), pages 2331-2370, July.
    7. Max Bruche & Frederic Malherbe & Ralf R Meisenzahl, 2020. "Pipeline Risk in Leveraged Loan Syndication," The Review of Financial Studies, Society for Financial Studies, vol. 33(12), pages 5660-5705.
    8. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, December.
    9. Leuz, C & Verrecchia, RE, 2000. "The economic consequences of increased disclosure," Journal of Accounting Research, Wiley Blackwell, vol. 38, pages 91-124.
    10. Yihui Wang & Han Xia, 2014. "Do Lenders Still Monitor When They Can Securitize Loans?," The Review of Financial Studies, Society for Financial Studies, vol. 27(8), pages 2354-2391.
    11. Vitaly M. Bord & João A. C. Santos, 2012. "The rise of the originate-to-distribute model and the role of banks in financial intermediation," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 21-34.
    12. Amar Gande & Anthony Saunders, 2012. "Are Banks Still Special When There Is a Secondary Market for Loans?," Journal of Finance, American Finance Association, vol. 67(5), pages 1649-1684, October.
    13. Craig W. Holden & Stacey Jacobsen, 2014. "Liquidity Measurement Problems in Fast, Competitive Markets: Expensive and Cheap Solutions," Journal of Finance, American Finance Association, vol. 69(4), pages 1747-1785, August.
    14. Ellis, Katrina & Michaely, Roni & O'Hara, Maureen, 2000. "The Accuracy of Trade Classification Rules: Evidence from Nasdaq," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(4), pages 529-551, December.
    15. Amiram, Dan & Owens, Edward & Rozenbaum, Oded, 2016. "Do information releases increase or decrease information asymmetry? New evidence from analyst forecast announcements," Journal of Accounting and Economics, Elsevier, vol. 62(1), pages 121-138.
    16. Christine A. Parlour & Guillaume Plantin, 2008. "Loan Sales and Relationship Banking," Journal of Finance, American Finance Association, vol. 63(3), pages 1291-1314, June.
    17. Robert M. Bushman & Abbie J. Smith & Regina Wittenberg‐Moerman, 2010. "Price Discovery and Dissemination of Private Information by Loan Syndicate Participants," Journal of Accounting Research, Wiley Blackwell, vol. 48(5), pages 921-972, December.
    18. Ivashina, Victoria & Sun, Zheng, 2011. "Institutional stock trading on loan market information," Journal of Financial Economics, Elsevier, vol. 100(2), pages 284-303, May.
    19. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    20. Yaniv Grinstein & Roni Michaely, 2005. "Institutional Holdings and Payout Policy," Journal of Finance, American Finance Association, vol. 60(3), pages 1389-1426, June.
    21. 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.
    22. Mark J. Kamstra & Gordon S. Roberts & Pei Shao, 2014. "Does the Secondary Loan Market Reduce Borrowing Costs?," Review of Finance, European Finance Association, vol. 18(3), pages 1139-1181.
    23. Rubin, Amir & Smith, Daniel R., 2009. "Institutional ownership, volatility and dividends," Journal of Banking & Finance, Elsevier, vol. 33(4), pages 627-639, April.
    24. Steven Drucker & Manju Puri, 2009. "On Loan Sales, Loan Contracting, and Lending Relationships," The Review of Financial Studies, Society for Financial Studies, vol. 22(7), pages 2635-2672, July.
    25. Lee, Charles M C & Ready, Mark J, 1991. "Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-746, June.
    26. Sudheer Chava & Michael R. Roberts, 2008. "How Does Financing Impact Investment? The Role of Debt Covenants," Journal of Finance, American Finance Association, vol. 63(5), pages 2085-2121, October.
    27. Harold Demsetz, 1968. "The Cost of Transacting," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 82(1), pages 33-53.
    28. Massoud, Nadia & Nandy, Debarshi & Saunders, Anthony & Song, Keke, 2011. "Do hedge funds trade on private information? Evidence from syndicated lending and short-selling," Journal of Financial Economics, Elsevier, vol. 99(3), pages 477-499, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Shai Levi & Xiao-Jun Zhang, 2015. "Do Temporary Increases in Information Asymmetry Affect the Cost of Equity?," Management Science, INFORMS, vol. 61(2), pages 354-371, February.
    2. Beyhaghi, Mehdi & Massoud, Nadia & Saunders, Anthony, 2017. "Why and how do banks lay off credit risk? The choice between retention, loan sales and credit default swaps," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 335-355.
    3. Nagar, Venky & Schoenfeld, Jordan & Wellman, Laura, 2019. "The effect of economic policy uncertainty on investor information asymmetry and management disclosures," Journal of Accounting and Economics, Elsevier, vol. 67(1), pages 36-57.
    4. João A. C. Santos & Pei Shao, 2023. "Investor Diversity and Liquidity in The Secondary Loan Market," Journal of Financial Services Research, Springer;Western Finance Association, vol. 63(3), pages 249-272, June.
    5. Amiram, Dan & Owens, Edward & Rozenbaum, Oded, 2016. "Do information releases increase or decrease information asymmetry? New evidence from analyst forecast announcements," Journal of Accounting and Economics, Elsevier, vol. 62(1), pages 121-138.
    6. Paul Demeré, 2023. "Is tax return information useful to equity investors?," Review of Accounting Studies, Springer, vol. 28(3), pages 1413-1465, September.
    7. Yanyi Ye & Yun Wang & Xiaoguang Yang, 2022. "Bank loan information and information asymmetry in the stock market: evidence from China," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-28, December.
    8. Vinay Patel, 2015. "Price Discovery in US and Australian Stock and Options Markets," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 27, July-Dece.
    9. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2000. "Commonality in liquidity," Journal of Financial Economics, Elsevier, vol. 56(1), pages 3-28, April.
    10. Vikas Agarwal & Wei Jiang & Yuehua Tang & Baozhong Yang, 2013. "Uncovering Hedge Fund Skill from the Portfolio Holdings They Hide," Journal of Finance, American Finance Association, vol. 68(2), pages 739-783, April.
    11. Colonnello, Stefano, 2017. "Internal governance and creditor governance: Evidence from credit default swaps," IWH Discussion Papers 6/2017, Halle Institute for Economic Research (IWH).
    12. Blankespoor, Elizabeth & deHaan, Ed & Marinovic, Iván, 2020. "Disclosure processing costs, investors’ information choice, and equity market outcomes: A review," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    13. Vinay Patel, 2015. "Price Discovery in US and Australian Stock and Options Markets," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 6-2015.
    14. Robert Stoumbos, 2023. "The Growth of Information Asymmetry Between Earnings Announcements and Its Implications for Reporting Frequency," Management Science, INFORMS, vol. 69(3), pages 1901-1928, March.
    15. Tarun Chordia & Jianfeng Hu & Avanidhar Subrahmanyam & Qing Tong, 2019. "Order Flow Volatility and Equity Costs of Capital," Management Science, INFORMS, vol. 65(4), pages 1520-1551, April.
    16. Zhang, Yue, 2015. "The securitization of gold and its potential impact on gold stocks," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 309-326.
    17. Goetzmann, William N. & Huang, Simon, 2018. "Momentum in Imperial Russia," Journal of Financial Economics, Elsevier, vol. 130(3), pages 579-591.
    18. Anne Michaels & Michael Grüning, 2017. "Relationship of corporate social responsibility disclosure on information asymmetry and the cost of capital," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 28(3), pages 251-274, October.
    19. Boulton, Thomas J. & Braga-Alves, Marcus V. & Kulchania, Manoj, 2014. "The flash crash: An examination of shareholder wealth and market quality," Journal of Financial Intermediation, Elsevier, vol. 23(1), pages 140-156.
    20. Kang, Di & Zhuang, Zhuang, 2019. "Should companies care who their lender is? Evidence from loan covenants," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).

    More about this item

    Keywords

    Secondary loan market; Stock bid-ask spread; Institutional investors; Information asymmetry; Insider trading;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finmar:v:67:y:2024:i:c:s1386418123000654. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/finmar .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.