The value of lending to bellwether firms by institutional investors

Abstract

We predict that institutional investors in loan syndicates charge bellwether firms lower loan spreads as compensation for having access to private information that can help identify trading opportunities in other firms' public market securities. Consistent with this prediction, when lending to bellwether firms, institutional investors charge a loan premium that is between 17 and 25 bps lower relative to non-bellwether firms, and earn annualized excess returns of 1.5–2.2% from trading in other firms' securities. Findings from cross-sectional analyses reveal that the reduction in loan spread is larger when the value of private information from bellwether firms is higher. Additionally, institutional lenders' excess returns are lower when lending to more transparent bellwether borrowers and when they pay a lower price—as reflected in loan spreads—in exchange for the private information, supporting the notion that the value of private information relates to institutional investors’ trading performance.