Informed trading on debt covenant violations: the long and short of it |
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| Authors: | Yushu Zhu Jennifer Gippel |
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| Affiliation: | 1. Business School, University of Queensland, Brisbane, QLD, Australia;2. Research School of Finance, Actuarial Studies and Applied Statistics, Australian National University, Canberra, ACT, Australia |
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| Abstract: | We examine whether disclosure of complex information events reduces information asymmetry by investigating the long‐ and short‐term impact of firms' disclosure of debt covenant violations on the probability of informed trading. We argue debt covenant violation disclosures provide informed agents with a long window of opportunity to trade on their private information largely due to the uncertainty arising from the debt renegotiation process. We find the probability of informed trading is greater after the disclosure, particularly when the violation outcomes are unresolved or where there is concern about possible future violations. |
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| Keywords: | Debt covenant violation disclosure Information asymmetry Probability of informed trading |
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