An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Regina Wittenberg Moerman
University of Chicago

Abstract: I employ unique data on secondary loan trades to explore how information asymmetry and the quality of financial reporting affect the trading spreads of private debt securities. There are two primary findings. First, the bid-ask spread in secondary loan trading is positively related to firm- and loan-specific characteristics associated with a high information asymmetry environment. Loans of private firms, loans without an available credit rating, loans syndicated by less reputable arrangers, distressed loans, and loans of loss firms are traded at significantly higher bid-ask spreads. Second, timely incorporation of economic losses into borrowers’ financial statements reduces the bid-ask spread at which their loans are traded. This finding suggests that high quality financial reporting reduces the information costs associated with debt agreements and increases the efficiency of the secondary trade.

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