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Do Lenders Still Monitor When They Can Securitize Loans?

Yihui Wang

Fordham University - Finance Area; Chinese University of Hong Kong

Han Xia

University of Texas at Dallas - Naveen Jindal School of Management

November 26, 2013

Review of Financial Studies, Forthcoming

We examine how securitization markets affect the role of banks as monitors in corporate lending. We find that banks active in securitization impose looser covenants on borrowers at origination. After origination, these borrowers take on substantially more risk than borrowers of non-securitization-active banks. We use borrowers’ geographic locations to instrument for borrower-lender matching to distinguish the effect of securitization on the banks’ ex-post monitoring from its effect on ex-ante screening. We further investigate direct evidence of banks’ monitoring role by examining their actions following covenant violations, and find that securitization-active lenders are more likely to grant waivers without changing loan terms. Our results suggest that banks exert less effort on ex-post monitoring when they can securitize loans.

Number of Pages in PDF File: 67

Keywords: Securitization, Monitoring, Collateralized Loan Obligations, Risk-taking, Covenants

JEL Classification: G31, G21, G32

Accepted Paper Series

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Date posted: March 23, 2011 ; Last revised: December 7, 2013

Suggested Citation

Wang, Yihui and Xia, Han, Do Lenders Still Monitor When They Can Securitize Loans? (November 26, 2013). Review of Financial Studies, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1787799 or http://dx.doi.org/10.2139/ssrn.1787799

Contact Information

Yihui Wang (Contact Author)
Fordham University - Finance Area ( email )
33 West 60th Street
New York, NY 10023
United States
Chinese University of Hong Kong ( email )
Room 219, KKL Building
Chinese University of HongKong
Shatin, New Territories
Hong Kong
852-26097755 (Phone)
Han Xia
University of Texas at Dallas - Naveen Jindal School of Management ( email )
P.O. Box 830688
Richardson, TX 75083-0688
United States
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