The Informational Efficiency of the Equity Market As Compared to the Syndicated Bank Loan Market |
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Authors: | Linda Allen Aron A Gottesman |
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Institution: | (1) Baruch College, CUNY, New York, NY, USA;(2) Lubin School of Business, Pace University, New York, NY, USA |
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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.
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Keywords: | Informational efficiency Market integration Granger causality Syndicated bank loans Equity |
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