FIN-04-017 |
NYU Stern School of Business |
September 2004
Linda Allen and Aron A. Gottesman
ABSTRACT
To our knowledge, this is the first paper to examine the informational efficiency of the equity
market as compared to the syndicated bank loan market. The loan market is a private market
comprised of financial institutions with access to private information. 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 find support for a liquidity
hypothesis, suggesting that equity markets lead loan markets, despite bank lenders’ access to
private information, because of greater liquidity in equity markets. Only when equity markets are
relatively illiquid do we find evidence supporting the private information hypothesis. Finally, we
find evidence of abnormal returns if portfolios are constructed using lagged equity returns to
designate investments in the syndicated bank loan market.
Linda Allen
Institution: Stern School of Business, New York University
Email: lallen@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~lallen
Aron A. Gottesman
Institution: Lubin School of Business, Pace University
Email: agottesman@pace.edu
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