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Do Lenders Still Monitor When They Can Securitize Loans?

Review of Financial Studies, Forthcoming

67 Pages Posted: 23 Mar 2011 Last revised: 7 Dec 2013

Yihui Wang

Fordham University

Han Xia

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: November 26, 2013

Abstract

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.

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

JEL Classification: G31, G21, G32

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: https://ssrn.com/abstract=1787799 or http://dx.doi.org/10.2139/ssrn.1787799

Yihui Wang (Contact Author)

Fordham University ( email )

33 West 60th Street
New York, NY 10023
United States

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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