The Informational Efficiency of the Equity Market as Compared to the Syndicated Bank Loan Market

Abstract

To our knowledge, this is the first paper to examine the informational efficiency of the equity market as compared to the syndicated bank loan market. The loan market is a private market comprised of financial institutions with access to private information. We test whether this isreflected in informationally efficient price formation in the loan market vis a vis the equity markets, and reject this private information hypothesis. We find support for a liquidity hypothesis, suggesting that equity markets lead loan markets, despite bank lenders access to private information, because of greater liquidity in equity markets. Only when equity markets arerelatively illiquid do we find evidence supporting the private information hypothesis. Finally, we find evidence of abnormal returns if portfolios are constructed using lagged equity returns todesignate investments in the syndicated bank loan market.