The Monitoring Incentive of Transactional and Relationship Lenders: Evidence from the Syndicated Loan Market

Abstract

We identify a group of lenders specializing in syndicating tradable loans (referred to as transactional lenders, “TLs”). We show that borrowers borrowing from TLs experience worse operating performance and more severe credit quality deterioration after loan origination compared to those borrowing from relationship lenders (“RLs”). This difference in the post-loan issue performance holds robust after controlling for the potential self-selection of the lender type, or using percentage of traded loans out of all syndicated loans to capture lenders’ propensity for syndicating tradable loans. Our results also remains qualitative the same after we drop various types of risky loans.

Keywords: Monitoring Incentive, Syndicated Loans, Secondary Loan Market, Transactional Lending, Relationship Banking

JEL Classification: G21, G23