Within-Syndicate Conflicts and Financial Contracts: Evidence from Bank Loans

63 Pages Posted: 26 Jan 2012

See all articles by Nishant Dass

Nishant Dass

Georgia Institute of Technology - Scheller College of Business

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Qinghai Wang

University of Central Florida - College of Business Administration

Date Written: January 19, 2012

Abstract

Using a sample of bank loans, we study how financial contracts are different when there are conflicts of interest not only between the contracting parties but within one of the contracting parties. Such conflicts can arise in lending syndicates when, for instance, the lead arranger has the incentive to support a poorly performing borrower while other syndicate participants do not. We argue that, in addition to being a device for monitoring the borrower, covenants enhance decision rights of participating lenders and can reduce the cost of intra-syndicate disagreements. We develop a simple model and find empirical support for its predictions: covenants are more likely to be present in syndicated loans and when conflicts of interest within the syndicate are greater (e.g., when participating banks' affiliates hold little equity in the borrower or when the lead arranger has a past lending relationship with the borrower). We also find that the potential for conflicts affects the choice of syndicate partners and that covenants substitute for lead arranger's loan allocation in mitigating conflicts.

Keywords: Bank Loans, Conict of Interest, Covenants, Lending Syndicate, Monitoring

JEL Classification: G20, G21, G32

Suggested Citation

Dass, Nishant and Nanda, Vikram K. and Wang, Qinghai, Within-Syndicate Conflicts and Financial Contracts: Evidence from Bank Loans (January 19, 2012). Available at SSRN: https://ssrn.com/abstract=1989582 or http://dx.doi.org/10.2139/ssrn.1989582

Nishant Dass (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-894-5109 (Phone)

HOME PAGE: http://scheller.gatech.edu/dass

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Qinghai Wang

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
United States

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