Bridging Markets: How Informed Debt Drives Stock Predictability

Abstract

This study delves into the dynamic interplay between syndicated loan and equity markets. We uncover the predictive power of non-public debt information on subsequent stock returns up to three months in the future. Around loan negotiation events, the information lead is most pronounced when secondary loan market quotes are highly informative. In addition, we identify key factors shaping the informativeness of loan quotes, including firm risk, monitoring intensity, loan liquidity, and lender structure. Our findings are robust and extend to the industry level, highlighting systematic advantages in the leveraged loan market. In light of our findings, we put forth practical investment strategies that capitalize on this distinctive information advantage.