BANK DEBT, INSIDER TRADING, AND THE RETURN TO CORPORATE SELLOFFS

Recent theoretical models suggest that banks carry out an evaluation and monitoring function for borrowers that entails the collection of private information from borrowers. In this paper, we present empirical evidence that the benefits of this evaluation and monitoring are reflected in the share price reaction to announcements of corporate selloff decisions. We also find a consistency in the pattern of selloff returns with respect to bank debt and insider trading. This implies that decisions of both quasi-insiders (banks) and traditionally recognized insiders (management) convey important information to financial market participants about the valuation of a major managerial announcement. © 1990.