Informed Bank Debt and Stock Returns

Abstract

Value-relevant non-public information embedded in bank loan spreads has significant economic value. We find that abnormal loan spreads negatively (positively) predict firms' future operating performance (performance un- certainty). However, equity analysts and investors are not privy to banks' private information. Firms with higher abnormal loan spreads experience more negative earnings surprises over the next several quarters. Their stocks underperform on average by about 0.5% per month with no reversals in longer horizons. This result is concentrated among loans associated with better borrower-lender relationship, indicating that relationship banking facilitates information acquisition. Furthermore, abnormal loan spreads negatively predict stock returns of borrowers' peer firms.