Bank Debt versus Bond Debt: Evidence from Secondary Market Prices

Edward I. Altman, New York University
Amar Gande, Southern Methodist University
Anthony Saunders, New York University

Abstract

This paper uses a new data set of daily secondary market prices of loans to analyze the specialness of banks as monitors. Consistent with a monitoring advantage of loans over bonds, we find the secondary loan market to be informationally more efficient than the secondary bond market prior to a loan default. Specifically, we find that secondary market loan returns Granger cause secondary market bond returns prior to a loan default. In contrast, secondary market bond returns do not Granger cause secondary market loan returns prior to a loan default.