Private information disclosure in the secondary loan market and its impact on equity market trading costs

When a firm's loans are first traded in the secondary market, private information about the firm is disclosed to a select group of large investors, so-called qualified institutional buyers (QIBs). We document a significant information effect that benefits these buyers in the firm's market for equity, in particular, a significant impact on equity market investors and the firm's stock bid-ask spreads, which benefits informed QIBs relative to retail investors. This informational benefit raises important regulatory issues related to disclosure and SEC regulations.