DP10446 | Insider Trading in the Bond Market: Evidence from Loan Sale Events

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We investigate the pricing implications of the parallel trading of loans and bonds of the same firm. We show that loan, by making lenders share sensitive information about the borrower with the loan market participants, lower the information advantage of the asset managers affiliated to the lender who respond by reducing their stake in the bonds of the firm whose loans are sold, independently of considerations about the future firm value. This reduces information asymmetry in the bond market and improves its liquidity. This provides the first evidence of a direct informational link between the loan and bond secondary markets.