Conference Paper

The role of information asymmetry and financial reporting quality in debt contracting: evidence from the secondary loan market

Abstract: I employ unique data on secondary loan trades to explore how information asymmetry and the quality of financial reporting affect the trading spreads of private debt securities. There are two primary findings. First, the bid-ask spread in secondary loan trading is positively related to firm and loan-specific characteristics associated with a high information asymmetry environment. Loans of private firms, loans without an available credit rating, loans syndicated by less reputable arrangers, distressed loans, and loans of loss firms are traded at significantly higher bid-ask spreads. Second, timely incorporation of economic losses into borrowers? financial statements reduces the bid-ask spread at which their loans are traded. This finding suggests that high quality financial reporting reduces the information costs associated with debt agreements and increases the efficiency of the secondary trade.

Keywords: Loans; Credit ratings;

Status: Published in Conference on Bank Structure and Competition (2006: 42nd) ; Innovations in real estate markets : risk, rewards, and the role of regulation


Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Part of Series: Proceedings

Publication Date: 2006

Number: 1031

Pages: 386-411