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Institutional Demand Pressure and the Cost of Corporate Loans

Victoria Ivashina

Harvard University; National Bureau of Economic Research (NBER)

Zheng Sun

University of California, Irvine - Paul Merage School of Business

February 1, 2010

Between 2001 and 2007, annual institutional funding in highly leveraged loans went up from $32 billion to $426 billion, accounting for nearly 70% of the jump in total syndicated loan issuance over the same period. Did the inflow of institutional funding in the syndicated loan market lead to mispricing of credit? To understand this relation, we look at the institutional demand pressure defined as the number of days a loan remains in syndication. Using market-level and cross-sectional variation in time-on-the-market, we find that a shorter syndication period is associated with a lower final interest rate. The relation is robust to the use of institutional fund flow as an instrument. Furthermore, we find significant price differences between institutional investors’ tranches and banks’ tranches of the same loans, even though they share the same underlying fundamentals. Increasing demand pressure causes the interest rate on institutional tranches to fall below the interest rate on bank tranches. Overall, a one-standard-deviation reduction in average time-on-the-market decreases the interest rate for institutional loans by over 30 basis points per annum. While this effect is significantly larger for loan tranches bought by structured investment vehicles (CDOs), it is not fully explained by their role.

Number of Pages in PDF File: 60

Keywords: Institutional investors, syndicated loans, LBO, credit crisis

JEL Classification: G11, G14, G21, G22, G23

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Date posted: November 16, 2008 ; Last revised: May 28, 2010

Suggested Citation

Ivashina, Victoria and Sun, Zheng, Institutional Demand Pressure and the Cost of Corporate Loans (February 1, 2010). Available at SSRN: https://ssrn.com/abstract=1299300 or http://dx.doi.org/10.2139/ssrn.1299300

Contact Information

Victoria Ivashina (Contact Author)
Harvard University ( email )
Harvard Business School
Baker Library 233
Boston, MA 02163
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Zheng Sun
University of California, Irvine - Paul Merage School of Business ( email )
Irvine, CA California 92697-3125
United States
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