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The Informational Efficiency of the Equity Market As Compared to the Syndicated Bank Loan Market

The Informational Efficiency of the Equity Market As Compared to the Syndicated Bank Loan Market The loan market is a hybrid between a public and a private market, comprised of financial institutions with access to private information about borrowing firms. We test whether this is reflected in informationally efficient price formation in the loan market vis-a-vis the equity markets, and reject this private information hypothesis. We also reject a liquidity hypothesis which suggests that equity markets always lead loan markets, despite bank lenders' access to private information, because of greater liquidity in equity markets. We further test, and reject, an asymmetric price reaction hypothesis that states that loan returns are more sensitive to negative information whereas equity returns respond symmetrically to both positive and negative information. We find evidence most consistent with an integrated markets hypothesis that suggests that both the equity and syndicated bank loan markets are highly integrated such that information flows freely across markets. This is particularly true when the equity market makers are also loan syndicate members. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Services Research Springer Journals

The Informational Efficiency of the Equity Market As Compared to the Syndicated Bank Loan Market

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References (46)

Publisher
Springer Journals
Copyright
Copyright © 2006 by Springer Science + Business Media, LLC
Subject
Finance; Financial Services; Macroeconomics/Monetary Economics//Financial Economics
ISSN
0920-8550
eISSN
1573-0735
DOI
10.1007/s10693-006-8738-z
Publisher site
See Article on Publisher Site

Abstract

The loan market is a hybrid between a public and a private market, comprised of financial institutions with access to private information about borrowing firms. We test whether this is reflected in informationally efficient price formation in the loan market vis-a-vis the equity markets, and reject this private information hypothesis. We also reject a liquidity hypothesis which suggests that equity markets always lead loan markets, despite bank lenders' access to private information, because of greater liquidity in equity markets. We further test, and reject, an asymmetric price reaction hypothesis that states that loan returns are more sensitive to negative information whereas equity returns respond symmetrically to both positive and negative information. We find evidence most consistent with an integrated markets hypothesis that suggests that both the equity and syndicated bank loan markets are highly integrated such that information flows freely across markets. This is particularly true when the equity market makers are also loan syndicate members.

Journal

Journal of Financial Services Research – Springer Journals

Published: Jul 27, 2006

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