The Informational Role of the Media in Private Lending
54 Pages Posted: 5 Jan 2014 Last revised: 10 Jun 2016
Date Written: June 9, 2016
We investigate whether a borrower’s media coverage influences the syndicated loan origination and participation decisions of informationally disadvantaged lenders, loan syndicate structures and interest spreads. In syndicated loan deals, information asymmetries can exist between lenders that have a relationship with a borrower and less informed, non-relationship lenders competing to serve as lead arranger on a syndicated loan, and also between lead arrangers and less informed syndicate participants. Theory suggests that the aggressiveness with which less informed lenders compete for a loan deal increases in the sentiment of public information signals about a borrower. We extend this theory to syndicated loans and hypothesize that the likelihood of less informed lenders serving as the lead arranger or joining a loan syndicate is increasing in the sentiment of media-initiated, borrower-specific articles published prior to loan origination. We find that as media sentiment increases (1) outside, non-relationship lenders have a higher probability of originating loans; (2) syndicate participants are less likely to have a previous relationship with the borrower or lead bank; (3) lead banks retain a lower percentage of loans and (4) loan spreads decrease.
Keywords: media, relationship lending, syndicate structure, lead arranger, sentiment
JEL Classification: G12, G21, M40, M41
Suggested Citation: Suggested Citation