Working Paper: CEPR ID: DP10446
Authors: Massimo Massa; Daniel Schmidt
Abstract: We investigate the pricing implications of the parallel trading of loans and bonds of the same firm. We show that loan, by making lenders share sensitive information about the borrower with the loan market participants, lower the information advantage of the asset managers affiliated to the lender who respond by reducing their stake in the bonds of the firm whose loans are sold, independently of considerations about the future firm value. This reduces information asymmetry in the bond market and improves its liquidity. This provides the first evidence of a direct informational link between the loan and bond secondary markets.
Keywords: Corporate Bonds; Information Asymmetry; Loan Trading
JEL Codes: G14; G21; G22; G23; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Loan trading (G21) | Bond yield spreads (G12) |
| Reduction in information asymmetry (D82) | Bond yield spreads (G12) |
| Loan trading (G21) | Direct information flow to bond market (G10) |
| Loss of informational advantage (D83) | Decrease in bond holdings by affiliated asset managers (G32) |
| Loan trading (G21) | Bond market liquidity (G10) |