Does the Secondary Loan Market Reduce Borrowing Costs?
Forthcoming in the Review of Finance
57 Pages Posted: 8 Aug 2012 Last revised: 28 Feb 2013
Date Written: April 7, 2012
We show that lenders make price concessions for the right to resell loans, and reveal a strong countervailing association between the ex ante probability of loan resale and the initial loan spreads. We disentangle the side effects (reduced monitoring) from the benefits (enhanced liquidity) brought by the secondary loan resales. The average net impact of simultaneously reducing the probability of the presence of resale constraint and raising the probability of resale across the full sample is to lower spreads by 14 basis points. On balance, the secondary loan market provides clear benefits to issuers of debt.
Keywords: Secondary loan pricing, banking, financial institutions
JEL Classification: G32
Suggested Citation: Suggested Citation