Bridging Markets: How Private Debt Informs Public Equity

Abstract

This article examines the dynamic interplay between syndicated loan and equity markets. We find that loan price changes predict stock returns up to three months ahead. The information lead is most pronounced when secondary loan market quotes are highly informative, especially for high-risk borrowers, actively monitored and frequently traded loans, facilities with institutional investor participation, and periods around loan negotiation events. The predictive relation also appears in industry-level returns, suggesting that loan prices contain information about broader sector conditions. Portfolio tests confirm that the predictive relation is economically relevant, although weaker in the more recent period. This attenuation is consistent with loan and equity markets becoming more connected over time, while information transmission across the two markets remains incomplete.