TAILIEUCHUNG - Informational efficiency of loans versus bonds: Evidence from secondary market prices - December 2004

Our bond price dataset is from the Salomon (now Citigroup) Yield Book. We extracted daily prices for all the companies for which we have loans in the loan price dataset. We have 386,171 bond-day observations spanning 816 bonds. For robustness, we also created another bond price dataset from Datastream for a subset of bonds, containing 91,760 bond-day observations spanning 248 bonds. We received the loan defaults data from Portfolio Management Data (PMD), a business unit of Standard & Poors which has been tracking loan defaults in the institutional loan mar- ket since 1995. We verified these dates in Lexis/Nexis and confirmed that they correspond to a missed interest. | Informational efficiency of loans versus bonds Evidence from secondary market prices Edward Altman Amar Gande and Anthony Saunders December 2004 Edward Altman is from the Stern School of Business New York University. Amar Gande is from the Owen Graduate School of Management Vanderbilt University. Anthony Saunders is from the Stern School of Business New York University. We thank the Loan Pricing Corporation LPC the Loan Syndications and Trading Association LSTA and the Standard Poors S P for providing us data for this study. We thank the seminar participants at the 2004 Bank Structure Conference of the Federal Reserve Bank of Chicago the 2003 Financial Management Association annual meeting and at Vanderbilt University for helpful comments. 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. We gratefully acknowledge financial support from the Dean s Fund for Faculty Research and the Financial Markets Research Center at the Owen Graduate School of Management. Please address all correspondence to Amar Gande Owen Graduate School of Management Vanderbilt University 401 21st Ave South Nashville TN 37203. Tel 615 343-7322. Fax 615 343-7177. Email . Abstract This paper examines the informational efficiency of loans relative to bonds using a unique dataset of daily secondary market prices of loans. We find that the loan market is informationally more efficient than the bond market prior to and surrounding information intensive events such as corporate loan and bond defaults and bankruptcies. Specifically we find that loan prices fall more than bond prices prior to an event and less than bond prices of the same borrower during a short time period surrounding an event. This evidence is consistent with a monitoring advantage of loans over bonds. Our results .

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