Institutional stock trading on loan market information

Over the past decade, one of the most important developments in the corporate loan market has been the increasing participation of institutional investors in lending syndicates. As lenders, institutional investors routinely receive private information about borrowers. However, most of these investors also trade in public securities. This leads to a controversial question: do institutional investors use private information received in the loan market to trade in public securities? In this paper, we examine the stock trading of institutional investors that also hold loans in their portfolio. Specifically, we look at the abnormal returns on stock trades following loan renegotiations. By collecting SEC filings of loan amendments, we are able to identify institutional investors that had access to private information disclosed by the borrower during loan renegotiations. Our results indicate that institutional managers that participate in loan renegotiations consequently trade in stock of the same company and outperform other managers by approximately 8.8% in annualized terms in the month following loan renegotiation.