- Information transmission between banks and the market for corporate controlDiscussion paper
Banks‘ interconnectedness is often seen as a major determinant of financial stability. Typically, the focus is on banks‘ financial linkages as they give rise to pecuniary externalities on banks‘ asset and liability side. Much less is known about information spillovers among banks, in part because it is difficult to empirically capture such information flows.
We use syndicated-loan networks of banks in conjunction with administrative security-transaction data to infer information flows around the announcement of corporate takeovers. This context helps to identify the source of private information. We make use of the fact that the incentives in passing on information about upcoming transactions vary across stocks and advisors. The granularity of the data allows us to control for other potential mechanisms.
This paper provides evidence that such information spillovers exist and economically benefit members of syndication networks: banks that are connected to advisors of takeover targets purchase the latter‘s shares. The significant return on the announcement of a planned takeover transaction enables these banks to buy shares beforehand at lower prices and thereby generate trading profits. We find these effects exclusively in connections to target advisors. Target advisors benefit directly from information leakage by additional demand prior to the announcement, which drives up the final offer price. This behaviour does not compromise the probability of bid success.