Loan Syndicate Structure: Evidence from Ex Post Data

Abstract

Because loan syndication involves a repeated game between lead banks and syndicate members we predict that lead banks do not use their private information to exploit participating banks in lending syndicates but rather focus on accurately certifying loan quality to build reputation for future deals. Examining the borrower's debt rating changes (and shifts in Altman's Z scores), we uncover evidence that the lead bank syndicates a larger proportion of loans subsequently not downgraded. Modeling the proportion of a loan syndicated, we find that lead banks employ covenant design and reputation to mitigate conflicts with syndicate participants. Both results support the certification view of the role of lead banks.

Keywords: Bank loans, certification, incentive conflicts

JEL Classification: G21