Bank Debt Versus Bond Debt: Evidence from Secondary Market Prices

This paper examines the price reaction of loans relative to bonds prior to and surrounding information intensive events, such as corporate (loan and bond) defaults, and bankruptcies using a unique dataset of daily secondary market prices of loans. Specifically, we find that risk-adjusted loan prices fall more than risk-adjusted bond prices prior to an event, and less than risk-adjusted bond prices of the same borrower during a short time period surrounding an event. This evidence is consistent with a monitoring advantage of loans over bonds. Our results are robust to a different empirical methodology (Vector Auto Regression based Granger causality), and to alternative explanations which control for security-specific characteristics, such as seniority, collateral, recovery rates, liquidity, covenants, and for multiple measures of cumulative abnormal returns