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Equity Price Discovery with Informed Private Debt

Author

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  • Jawad M Addoum
  • Justin R Murfin
  • Itay Goldstein

Abstract

Equity markets fail to account for the value-relevant nonpublic information enjoyed by syndicated loan participants and reflected in publicly posted loan prices. A long-short strategy that buys (sells) the equities of firms with recently appreciated (depreciated) loans earns large risk-adjusted returns, suggesting a surprising and economically important level of segmentation across the same firm’s capital structure. The information lag captured by trading strategy returns is not affected by drivers of firm-specific attention, including the publication of loan returns in the Wall Street Journal. Instead, returns to the strategy are eliminated among equities held by mutual funds also trading in syndicated loans.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • 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.
    • Handle: RePEc:oup:rfinst:v:33:y:2020:i:8:p:3766-3803.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhz128
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    Citations

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    Cited by:

    1. 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).
    2. Álvarez-Botas, Celia & González, Víctor M., 2024. "How does credit information sharing shape bank loans?," The Quarterly Review of Economics and Finance, Elsevier, vol. 95(C), pages 18-32.
    3. Bilan, Andrada & Ongena, Steven & Pancaro, Cosimo, 2023. "Bank private information in CDS markets," Working Paper Series 2818, European Central Bank.
    4. Bittner, Christian & Fecht, Falko & Pala, Melissa & Saidi, Farzad, 2022. "Information transmission between banks and the market for corporate control," Discussion Papers 29/2022, Deutsche Bundesbank.
    5. Paul Demeré, 2023. "Is tax return information useful to equity investors?," Review of Accounting Studies, Springer, vol. 28(3), pages 1413-1465, September.
    6. Christian Bittner & Falko Fecht & Melissa Pala & Farzad Saidi, 2024. "Strategic Communication Among Banks," CRC TR 224 Discussion Paper Series crctr224_2024_587, University of Bonn and University of Mannheim, Germany.
    7. Jung Koo Kang & Christopher D. Williams & Regina Wittenberg-Moerman, 2021. "CDS trading and nonrelationship lending dynamics," Review of Accounting Studies, Springer, vol. 26(1), pages 258-292, March.
    8. Keßler, Andreas & Mählmann, Thomas, 2022. "Trading costs of private debt," Journal of Financial Markets, Elsevier, vol. 59(PB).
    9. Li, Jiacui, 2022. "Endogenous inattention and risk-specific price underreaction in corporate bonds," Journal of Financial Economics, Elsevier, vol. 145(2), pages 595-615.

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