Private Information Dissemination in the Secondary Loan Market

We consider loans being marked to market to constitute information about borrowing firms’ profitability and risk only immediately available to large institutional traders, so-called qualified institutional buyers (QIBs). Smaller investors, so-called non-QIBs, do not have immediate access to such information because they are not qualified to enter the secondary loan market. We investigate the effect of privileged information releases first on stock bid-ask spreads, then on the abnormal returns QIBs earn by trading borrowing firms’ stock. We show QIBs to actively trade on information in the equity market, elevating the level of information asymmetry while earning significant returns. Our paper reveals private information dissemination in the secondary loan market to affect the stock market information environment and yield benefits to large insiders with priority access to important information about the quality of borrowing firms.