Dynamic Disclosures and the Secondary Market for Loans

• In Event: Analytical Models

Abstract

The owner of a firm raises funds from a bank and invests in a positive NPV project. A potential loan sale by the bank in the secondary market influences the owner’s dynamic disclosure policy, which in turn generates economic consequences. First, we predict that public news affects the likelihood of a loan sale in the same direction that it affects the default probability. Second, we identify conditions under which greater bank monitoring of the owner’s information endowment mitigates agency costs associated with moral hazard. Finally, if the bank incurs transaction costs whenever it sells the loan, we predict that an opportunity to disclose a second time after the loan sale decreases the ex-ante equity value, relative to when the owner could disclose only once before such a loan sale.

Authors

• Davide Cianciaruso, Northwestern University

• Dor Lee-Lo, Tel Aviv University

• Sri S. Sridharan, Northwestern University