Bank Debt Versus Bond Debt: Evidence from Secondary Market Prices

53 Pages Posted: 3 Jan 2005

See all articles by Amar Gande

Amar Gande

Southern Methodist University (SMU) - Finance Department

Edward I. Altman

New York University (NYU) - Salomon Center; New York University (NYU) - Department of Finance

Anthony Saunders

New York University - Leonard N. Stern School of Business

Date Written: October 2006

Abstract

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.

Keywords: Bankruptcy, bonds, default, loans, monitoring, spillovers, stocks

JEL Classification: G14, G21, G22, G23, G24

Suggested Citation

Gande, Amar and Altman, Edward I. and Saunders, Anthony, Bank Debt Versus Bond Debt: Evidence from Secondary Market Prices (October 2006). Available at SSRN: https://ssrn.com/abstract=639081 or http://dx.doi.org/10.2139/ssrn.639081

Amar Gande (Contact Author)

Southern Methodist University (SMU) - Finance Department ( email )

United States
2147681945 (Phone)
2147684099 (Fax)

Edward I. Altman

New York University (NYU) - Salomon Center ( email )

44 West 4th Street
New York, NY 10012
United States
212-998-0709 (Phone)
212-995-4220 (Fax)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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New York, NY 10012-1126
United States

Anthony Saunders

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

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