The Informational Advantage of Local Investors: Evidence from Fund Managers’ Trades Around Credit Events

Abstract

We examine whether actively managed equity mutual funds trade on localised information events - syndicated loan covenant violations and changes in bank loan and entity ratings. Local investors achieve positive abnormal stock returns only around covenant violation periods rather than changes in credit ratings. Local investors appear to adjust their holdings at least three months prior to covenant violations. Mutual funds’ holdings of local stocks and stocks affected by covenant violations predict higher performance. Finally, to identify the possible information channel utilized by local investors, we find that local investors learn from insiders’ previous trades but not from their connection with syndicated loan network. Overall, our findings suggest that local investors have information advantages over distant counterparts due to their geography proximity to affected firms around credit events.