تاثیر شرکت های مشترک بر نقدینگی همزمان در بازارهای سهام و وام بانکی

Market liquidity is impacted by the presence of financial intermediaries that are informed and active participants in both the equity and the syndicated bank loan markets, specifically informationally advantaged lead arrangers of syndicated bank loans that simultaneously act as equity market makers (dual market makers). Employing a two-stage procedure with instrumental variables, we identify the simultaneous equations model of liquidity and dual market maker decisions. We find that the presence of dual market makers improves the liquidity of the more competitive and transparent equity markets, but widens the spread in the less competitive over-the-counter loan market, particularly for small, informationally opaque firms.

The glue that connects markets is the financial intermediary. In order to be considered a major player, a financial intermediary maintains a presence in all of the major financial markets in the world. Participating in multiple financial markets can be particularly lucrative if information obtained in one market is useful in other, related markets. For example, information about fundamental firm value obtained in debt and derivatives markets may be reusable in equity markets. Conversely, information about equity market order flow may be reusable in debt and derivatives markets. The reusability of information has motivated the potentially synergistic combination of commercial and investment banking activities into large complex financial institutions. When information is used effectively, these institutions can be net liquidity providers to global financial markets. However, large complex financial institutions can sometimes blockade market liquidity, thereby reducing trading efficiency. Indeed, the crisis of 2007–2009 demonstrates the crucial role financial institutions play in the liquidity of these markets. The gradual relaxation and the eventual repeal of the Glass-Steagall Act in 1999 expanded banking powers to include a broad range of banking, securities underwriting and insurance activities. However, there is a growing debate about whether the benefits of such expansions outweigh the costs.1Berger and Bouwman (2009) show that large banks contributed most to the creation of liquidity in the economy over the period from 1993 to 2003. However, this liquidity increase may have been obtained at the cost of financial market fragility, as the reach of global financial institutions contagiously spread risk throughout the financial system (highlighted by the financial crisis of 2007–2008). In this paper, we examine how simultaneous trading by global financial institutions across financial markets impacts the liquidity and informational efficiency of asset prices across markets.2 In particular, we focus on financial intermediaries that are informed and active participants in both the syndicated bank loan and the equity markets. We define dual market makers to be financial intermediaries that are simultaneously equity market makers as well as lead arrangers of bank loan syndicates. In our formulation, these dual market makers are among the most informed participants in the market, because they can extract information from both the syndicated loan market and the equity market. The lead arranger, in contrast to other loan syndicate participants, is typically a bank with a prior lending relationship with the borrower. In the course of a long-term banking relationship that includes the provision of a myriad of deposit, cash-management and lending services, the relationship bank gathers private information about the borrower. There is an extensive literature describing the private information generated in the course of a long-term bank-borrower relationship; see Boot (2000) for a survey of relationship lending. This private information advantage is most valuable for small borrowing firms. Small borrowing firms tend to be more informationally opaque than larger firms because they have fewer market makers, less analyst coverage, and tend to have greater information asymmetries.3 By virtue of its access to this private information, the lead arranger screens the loan on behalf of all lenders in the syndicate.4 Moreover, as a result of concern about a potential lemons problem in the presence of these informational asymmetries, the lead arranger precommits to the other (less informed) syndicate members by holding a large portion of the loan until maturity.5 The lead bank’s stake (and the accounting requirement that this position is generally marked to market) therefore provides it with strong incentives for market making in the secondary loan market, as well as ongoing monitoring during the life of the loan. Gande and Saunders (2006) show that monitoring and secondary market activity are complements in the syndicated loan market, such that the relationship bank profits from its informational advantage in all aspects of its role as lead arranger – monitoring the borrower, managing the syndicate, and providing liquidity to the secondary market when needed. Indeed, it is understood that the lead arranger will manage secondary market trading, for example, by facilitating price discovery or by enforcing covenants requiring prior consent by the lead arranger (and/or the borrower) for secondary market transactions.6 Given the repetitive nature of the syndication process, the failure of a lead arranger to provide market making services in the secondary loan market when required would likely impair that bank’s ability to create syndicates in the future. The financial intermediary that syndicated a bank loan may also have incentives to make markets in the borrowing company’s stock. While the private information generated from the loan market will impact the bank’s trading activity in the equity market, the dual market maker can also extract valuable information from the equity market order flow that is not shared by other traders in the loan market. Equity market making may produce information that complements the information about fundamental firm value obtained from the loan market. That is, while the loan syndicate has more micro-level information about the firm’s fundamental value, equity market traders may have more macro-level information, e.g., regarding the general macroeconomic environment that is relevant to the firm, industry growth perspectives, the company’s competitors, suppliers and the demand for its products. It is therefore reasonable to assume that the lead arranger of a bank loan syndicate may have private information about a publicly traded borrower that a random equity market maker may not have, in part due to the depository and lending relationship that the lead arranger has with the borrower. Symmetrically, an equity market maker may have information about the firm that bank loan syndicate leaders without any presence in equity markets do not have. The financial intermediary’s presence in both the equity and the syndicated loan markets allows them to collect information from both markets and subsequently profit from trading in both markets. We further expect that the effect of the financial intermediary’s presence to be strongest for small borrowers that have more information asymmetry, less analyst following, fewer market makers, and are less transparent. The identification of dual market makers as traders with an information advantage allows us to investigate the role of informed financial institutions on market liquidity and the informativeness of asset prices. We hypothesize that the presence of a “super-informed” dual market maker impacts liquidity and the price discovery process in both the equity and syndicated bank loan markets. However, the impact of the dual market maker on each market can be very different, depending on the nature of the market. In this paper, we hypothesize that the presence of dual market makers decreases the bid-ask spread in the equity market (liquidity enhancement effect), and increases the spread in the syndicated loan market (negative liquidity effect). We develop this fundamental hypothesis in three stages: 1. Dual market makers are “super informed.” As the lead arranger in a syndicated bank loan, the dual market maker has private information about the firm obtained in the course of a depository and lending relationship. As an equity market maker, the dual market maker has superior information about order flow and industry level macro-information. The dual market maker’s informational advantage should be less significant for large, informationally transparent firms. 2. Equity markets are more transparent, more competitive, and have more liquidity traders than the syndicated bank loan market, which is opaque and limited to institutional participants trading over-the-counter. 3. Because of the differing structures of syndicated bank loan markets and equity markets, the presence of a dual market maker will increase spreads in the syndicated bank loan market and decrease spreads in the equity market, most substantially for smaller firms. However, the presence of a dual market maker is not exogenously determined. Loan syndicate arrangers will have a greater incentive to make markets in equity when the profit opportunities are high. This will be the case when there is a large and active equity market with profitable spread levels, and when the degree of information asymmetry in the equity market is large. Formal tests for endogeneity reject the null hypothesis of no endogeneity and affirm the need to control for the endogenous presence of dual market makers. We explicitly model the presence of a dual market maker in the empirical analysis by using a simultaneous equation model. Specifically, we estimate the impact of the dual market maker’s presence on market liquidity using a two-stage procedure that permits simultaneous multivariate estimation of one continuous dependent variable and one discrete dependent variable, corresponding to the technique detailed in Maddala (1983). We employ the Sargen test, the Anderson underidentification test, the test proposed by Bound et al. (1995) and Staiger and Stock (1997), and the Stock–Yogo (2005) test to confirm the selection of our instruments and the identification of our equation systems. After accounting for the endogeneity of the dual market maker decision, we find a significant increase in equity market liquidity in the presence of dual market makers. The presence of a dual market maker reduced equity spreads by 39.5 basis points, about 35% of the mean equity spread, consistent with the liquidity enhancement effect for the more competitive equity market. In contrast, we find a significant increase in loan spreads in the presence of dual market makers, with an increase of 25.3 basis points (21% of the mean loan spread), consistent with the negative liquidity effect for the less competitive loan market. These effects are only significant for smaller firm borrowers/issuers; for larger firms, the effects are insignificant. These results are consistent with the hypothesis that the marginal effect of dual market presence is greater for firms with greater information asymmetry and less transparency. In addition, we find that the lead arranger of a syndicated bank loan is more likely to also be an equity market maker when the profit opportunity of market making is high. This occurs when the equity market is large, when the dual market maker has a greater informational advantage over other equity market makers, and when the dual market maker has more market power. Our model focuses on the lead arranger’s decision to make markets in the equity market rather than the equity market maker’s decision to be a lead arranger in the syndicated loan market. This is because it is well established in both the academic literature and among practitioners that the borrower typically chooses the lead arranger on the basis of a prior banking relationship (see Ivashina, 2009 and Allen and Gottesman, 2006 and Dennis and Mullineaux (2000)). The syndicate is then formed by the lead arranger. This is consistent with our hypothesis in that it is the private information about fundamental firm value obtained in the course of relationship banking that is the source of the lead arranger’s informational advantage. In contrast, the equity market maker has superior information about market liquidity and order flow, but not necessarily about fundamental firm value. The paper is organized as follows. Hypothesis development, the sample selection and data description appear in Section 2. Section 3 lays out the empirical methodology and the results of the empirical tests on the impact of the presence of a dual market maker on liquidity in the equity and loan markets. Section 4 examines the robustness of our results, including various subsample analyses and employing a propensity score matching methodology. Section 5 offers policy implications and conclusions.

This paper is the first to study the role of a financial intermediary that simultaneously serves as a lead arranger for a syndicated bank loan and acts as an equity market maker for the borrowing firm’sstock, denoted a dual market maker. The lead arranger of a syndicated bank loan possesses private information about the borrowing firm, typically obtained over the course of a long-term lending rela- tionship. In addition, participating in the equity market allows the lead arranger to gain valuable and complementary information from the order flows. We consider the impact on market liquidity of the presence of such an informed market maker. We hypothesize that in a transparent competitive market with a lot of liquidity traders, such as the equity market, the informed dual market maker behaves as a natural liquidity provider and helps to reduce the bid-ask spread in the equity market. However, in an opaque and less competitive market such as the syndicated loan market, the information advantage of the dual market maker results in a higher spread. These effects should be more pronounced for small firms that tend to be informationally opaque. Empirically, we analyze the equity and loan market liquidity in the presence of a dual market ma- ker while accounting for the endogeneity of the choice to be a dual market maker. We find that the lead arranger of a syndicated bank loan is more likely to be an equity market maker when the profit opportunities of market making are high. This occurs when the dual market maker has a greater infor- mational advantage over other equity market makers, when the equity market capitalization is large, and when the lead arranger has a larger market share in the loan market. Using a two-stage procedure, we find that the presence of a dual market maker reduces equity spreads, but increases loan spreads. Although these effects are found in our entire sample, they are only statistically significant for a sub- sample comprised of small firm borrowers. Our analysis has major policy implications related to regulations on information flows within financial intermediaries – in particular, the possibility that dual market making violates insider trad- ing laws. This is a murky area, in part, because ‘‘securities laws neither provide a definition of ‘insider trading’ nor expressly forbid it’’ ( Eads, 1991, p. 1457 ). Indeed, Congress may have deliberately refused to precisely define insider trading so as to give the SEC more flexibility in enforcement. Recent court cases have developed the theory that insider trading involves misappropriation. ‘‘’Misappropriation trading’ results when a trader exploits material, non-public information to trade securities and breaches a duty owed to the source of such information’’ ( Prakash, 1991 , p. 1493). However, where the divider lies between legal and illegal activity is not always clear. It is unclear whether members of a loan syndicate owe a fiduciary duty to the borrower or even if they are privy to ‘‘material’’ infor- mation in a legal sense. Although this paper does not address the question of whether illegal trading activity is taking place, we demonstrate that the presence of global financial institutions, simulta- neously trading in many financial markets, affects the liquidity and information efficiency of asset prices in these markets. Hence, we demonstrate that policy proposals regarding ‘‘Chinese’’ and ‘‘eth- ical’’ walls restricting the reusability of information within financial institutions should consider the potential impact on market efficiency