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Price Discovery and Dissemination of Private Information by Loan Syndicate Participants

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  • We have benefited from the comments of Ray Ball, Ryan Ball, Philip Berger, Douglas Diamond, Andrei Kovrijnykh, Jeff Ng, Jeffrey Russell, Robert Sanchez, Doug Skinner, Dan Susik, Chris Williams, Gregory Udell (Discussant) and participants at the 45th Conference on Bank Structure and Competition, Emanual Zur (Discussant) and the participants at the 8th London Business School Accounting Symposium, and seminar participants at Boston University, Southern Methodist University, the University of Chicago, the University of Houston, the University of Michigan, the University of Technology at Sydney, and the University of Toronto. We are grateful to Marty Butler, Arthur Kraft, and Ira Weiss for sharing their program for computing intraperiod timeliness. We thank Eugene Soltes for media data, Greg Nini, David Smith, and Amir Sufi for covenant violations data and the Loan Pricing Corporation for loan data. We thank Fei Chen and Eugene Soltes for their excellent research assistance. We gratefully acknowledge the financial support of the Kenan-Flagler Business School; the University of North Carolina at Chapel Hill; the University of Chicago Booth School of Business; and the Wharton School, University of Pennsylvania. Part of the work on this article was completed while Regina Wittenberg-Moerman was on the faculty at the Wharton School, University of Pennsylvania.

ABSTRACT

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 relationship-based 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.

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