Information Production in the Market for Private Placements
Presentation
Overview
Overview
Description
Private debt and equity markets are an increasingly important, yet relatively opaque, part of the United States’ capital markets system. Due to substantial information asymmetry in the market for private placements, investors are given the opportunity to gather information during the due diligence and monitoring process. We investigate the impact of this information production on institutional trading by examining holdings and trades of insurance companies who account for a major portion of this market. The uniquely detailed nature of insurance regulatory reporting enables us to observe the set of firms with which insurers have private debt or equity relationships as well as all insurer trades in those firms. We find that insurers with an existing private debt or equity relationship with a firm are significantly more likely to make a trade in that firm’s publicly traded equity, and when they do, the trade is significantly larger than their other trades. In addition, trades associated with a private debt placement at the same insurer generate abnormal performance. Taken together, our results suggest that information production by insurers in private capital markets materially affects trading strategy and performance.
