Sharing Surplus with Clients: Evidence from the Protection of Bank Proprietary Information

57 Pages Posted: 18 Apr 2016 Last revised: 19 Jan 2019

See all articles by Yupeng Lin

Yupeng Lin

National University of Singapore

Zilong Zhang

City University of Hong Kong

Liping Zhao

Hong Kong University of Science & Technology (HKUST)

Date Written: June 25, 2018

Abstract

We examine the effect of protecting banks’ proprietary information on the dynamics of lending relationship. In particular, after banks’ trade secrets are protected by the Inevitable Disclosure Doctrine (IDD), banks offer loans with lower interest rates and longer maturities to borrowers. The existence of this ex ante surplus sharing is explained by the fact that a relationship bank, once protected by IDD, is more likely to be chosen as a lead arranger and extract surplus ex post. Further analyses reveal that the surplus sharing is more pronounced when borrowers are opaque or have a stable management team and when banks face high competition from potential entrants. Finally, banks whose trade secrets are better protected take a larger stake in the loan syndication.

Keywords: Proprietary information; Relationship lending; Information surplus; Intertemporal loan pricing

JEL Classification: G21, D80, D40

Suggested Citation

Lin, Yupeng and Zhang, Zilong and Zhao, Liping, Sharing Surplus with Clients: Evidence from the Protection of Bank Proprietary Information (June 25, 2018). Available at SSRN: https://ssrn.com/abstract=2766108 or http://dx.doi.org/10.2139/ssrn.2766108

Yupeng Lin

National University of Singapore ( email )

15 Kent ridge drive
Singapore
Singapore

HOME PAGE: http://sites.google.com/site/scottlinyupeng/

Zilong Zhang

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Liping Zhao (Contact Author)

Hong Kong University of Science & Technology (HKUST) ( email )

4054 LSK, HKUST
Clear Water Bay
Hong Kong, 999999

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