We predict that institutional investors in loan syndicates charge bellwether firms lower loan spreads as compensation for having access to private information that can help identify trading opportunities in other firms' public market securities. Consistent with this prediction, when lending to bellwether firms, institutional investors charge a loan premium that is between 17 and 25 bps lower relative to non-bellwether firms, and earn annualized excess returns of 1.5–2.2% from trading in other firms' securities. Findings from cross-sectional analyses reveal that the reduction in loan spread is larger when the value of private information from bellwether firms is higher. Additionally, institutional lenders' excess returns are lower when lending to more transparent bellwether borrowers and when they pay a lower price—as reflected in loan spreads—in exchange for the private information, supporting the notion that the value of private information relates to institutional investors’ trading performance.

This study shows that initiation of credit default swap (CDS) trading for an entity's debt increases the share of loans retained by loan syndicate lead arrangers and increases loan spread. These findings are consistent with CDS initiation reducing the effectiveness of a lead arranger's stake in the loan to serve as a mechanism to address the adverse selection and moral hazard problems in the loan syndicate. Additional findings corroborate this interpretation by revealing a moderating effect for firms with greater transparency, for loans originated by a lead arranger with a strong reputation in this market, and for firms with relatively illiquid CDS markets.