Less Informed Lenders and Signaling: Evidence from Syndicated Loans
Posted: 6 Mar 2014
Date Written: March 5, 2014
This paper empirically studies how less informed lender wins the position of lead arranger in syndicated loans. We investigate the hypothesis that such lender signals loan quality by restricting deal size to less than that of the most informed lender. Since the less informed lender has smaller stakes in outstanding sole-lender loans than the most informed does, a large deal size may signal that the deal is excessively risky. Deal size works as a signaling device because cost of originating risky loans depends on each lender's amount of outstanding loans. We provide supportive evidence and argue that substantial signaling cost is the impediment to the less informed arrangers.
Keywords: Syndicated loan, Asymmetric information, Signaling, Relationship lending, Multinomial logit model
JEL Classification: G21; G28; G18; G01
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