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Bank Debt versus Bond Debt: Evidence from Secondary Market Prices


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    See Saunders and Cornett (2008) for a comprehensive review of why banks are considered special.

  • We thank the editor (Deborah Lucas) and two anonymous referees for their valuable comments and suggestions. Our paper has benefited from helpful comments from Cliff Ball, Mark Carey, Sandeep Dahiya, Mark Flannery, Edith Hotchkiss, Craig Lewis, Ron Masulis, Manju Puri, Hans Stoll, and the seminar participants at the Western Finance Association annual meeting, the American Economic Association annual meeting, the Bank Structure Conference of the Federal Reserve Bank of Chicago, the Financial Management Association annual meeting, and at Vanderbilt University. We also thank Steve Rixham, Vice President, Loan Syndications at Wachovia Securities, for helping us understand the institutional features of the syndicated loan market, and Ashish Agarwal, Victoria Ivashina, and Jason Wei for research assistance, and the Loan Pricing Corporation (LPC), the Loan Syndications and Trading Association (LSTA), and Standard & Poor's (S&P) for providing us data for this study.


This paper uses a new data set of daily secondary market prices of loans to analyze the specialness of banks as monitors. Consistent with a monitoring advantage of loans over bonds, we find the secondary loan market to be informationally more efficient than the secondary bond market prior to a loan default. Specifically, we find that secondary market loan returns Granger cause secondary market bond returns prior to a loan default. In contrast, secondary market bond returns do not Granger cause secondary market loan returns prior to a loan default.