Asymmetry Information and Diversification Effect on Loan Pricing in Asia Pacific Region 2006-2010

27 Pages Posted: 29 Oct 2012 Last revised: 14 Jan 2013

See all articles by Yudi Tanjung

Yudi Tanjung

Faculty of Business & Economics, University of Surabaya

Deddy Marciano

Universitas Surabaya - Faculty of Business & Economics

James Bartle

University of New South Wales (UNSW)

Date Written: October 28, 2012

Abstract

Purpose of this study is to test the asymmetry information influence towards lead arranger and participant in syndicated loans. In syndicated loans, lead arranger are responsible in the loan establishment and act as intermediary between borrower and syndicated members. It cause participant to be highly dependent to the lead arranger. The theory predicts that the higher asymmetry information between lead arranger and participant will cause participant to expect a higher loan pricing, and a bigger lead share will reduce this effect. Conversely, a bigger lead share will resulted in a higher monitoring risk and credit risk for the lead arranger, which cause lead arranger to expect a higher loan pricing. Therefore, the establishment of loan pricing are affected by two opposite effect, asymmetry information effect (participant pricing) and diversification effect (lead pricing).

This study uses two stage least squares (2SLS) to determine the existence of asymmetry information effect and diversification effect in loan pricing. This study used a sample of the entire LIBOR-based lending in Asia Pacific region for the period 2006-2010.

This research shown that diversification effect indeed affecting the loan pricing in Asia Pacific, while asymmetry information effect in not proven. This is because Asia Pacific loans have a high average lead share (75%) and most of the loans have more than one lead arranger. The study also found that lenders tend to consider the economy conditions of a nation and previous relationship with the borrower than the financial performance of each borrower.

Keywords: credit risk, reputation, lead share, loan pricing, loan, syndicate

JEL Classification: G21

Suggested Citation

Tanjung, Yudi and Marciano, Deddy and Bartle, James, Asymmetry Information and Diversification Effect on Loan Pricing in Asia Pacific Region 2006-2010 (October 28, 2012). Asian Finance Association (AsFA) 2013 Conference. Available at SSRN: https://ssrn.com/abstract=2167805 or http://dx.doi.org/10.2139/ssrn.2167805

Yudi Tanjung

Faculty of Business & Economics, University of Surabaya ( email )

Jl. Ngagel Jaya Selatan 169
Surabaya, Jawa Timur 60284
Indonesia

Deddy Marciano (Contact Author)

Universitas Surabaya - Faculty of Business & Economics ( email )

Jl. Ngagel Jaya Selatan 169
Surabaya, Jawa Timur 60284
Indonesia

James Bartle

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

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