Institutional Lenders, Trading Incentives, and Corporate Disclosure

This study examines the influence of institutional lenders, whose portfolios hold both loans and equity securities, on firms’ public and private disclosure practices. Using mergers between an institutional shareholder and a lender of the same firms as an exogenous shock to the existence of institutional lenders, we document that after the mergers, firms are significantly less likely to provide management forecasts and disclose fewer voluntary 8-K items. Meanwhile, through contractual provisions, these firms are required to provide more private disclosure such as internal projections and monthly financial statements to their institutional lenders. We further show that these effects are driven by a subsample of firms whose stocks are more actively traded by their institutional lenders and that institutional lenders make more profitable trades on firms who withhold public disclosures. Overall, our results suggest that institutional lenders strategically influence firms’ public and private disclosure practices to maintain and enhance their information and trading advantages in the equity market.