The Role of Information from International Bank Lending in Mutual Fund Equity Investing

Abstract

Bank loan rates include monopoly rents from private information obtained in the course of lending relationships. Despite insider trading restrictions, some studies using U.S. data suggest that this private information is utilized in managing mutual fund equity portfolios at bank-affiliated funds. This does not hold in the international context. We find that lending bank-affiliated international mutual funds restrict equity holdings in non-U.S. borrowing firms when affiliated banks initiate syndicated bank loans. Reduced bank-affiliated mutual fund equity holdings and more intensive lending are associated with increased monopoly rents in loan rates. These effects are most pronounced for borrowers in emerging countries.