Institutional Equity Investment, Asymmetric Information and Credit Spreads

42 Pages Posted: 30 Jun 2006

See all articles by Ashley Wang

Ashley Wang

Board of Governors of the Federal Reserve System

Gaiyan Zhang

University of Missouri at Saint Louis - College of Business Administration

Date Written: June 2006

Abstract

Theoretical work suggests that information risk affects corporate bond pricing. This paper empirically examines the relation between information asymmetry, a specific aspect of information risk, and bond yield spreads. Using equity holdings by different institutions following distinct investment and trading styles, we find that yield spreads narrow (widen) with an increase in equity holdings by institutional groups that are more (less) sensitive to information asymmetry. This relation is strongest for bonds with short maturities, lower ratings, higher leverage, and higher equity return volatilities. The relation between yield spreads and different institutional equity holdings is not subsumed by other information risk measures, including probability of informed trading, bid-ask spread, analyst forecast dispersion, and accounting disclosure rankings. It also survives adjustments for the equity style of the issuing company. Moreover, the relation holds for both the level and changes in bond yield spreads.

Keywords: Credit Spread, Institutional Equity Ownership, Information Asymmetry

JEL Classification: G12, G32

Suggested Citation

Wang, Ashley and Zhang, Gaiyan, Institutional Equity Investment, Asymmetric Information and Credit Spreads (June 2006). Available at SSRN: https://ssrn.com/abstract=890864 or http://dx.doi.org/10.2139/ssrn.890864

Ashley Wang (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Gaiyan Zhang

University of Missouri at Saint Louis - College of Business Administration ( email )

One University Blvd.
487 SSB
St. Louis, MO 63121
United States

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