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Diversification or Specialization? An Analysis of Distance and Collaboration in Loan Syndication Networks

47 Pages Posted: 25 Feb 2017  

Jian Cai

Washington University in St. Louis

Frederik Eidam

University of Mannheim; Centre for European Economic Research (ZEW)

Anthony Saunders

New York University - Leonard N. Stern School of Business

Sascha Steffen

Frankfurt School of Finance & Management

Date Written: February 22, 2017

Abstract

In this paper, we study the organizational form of loan syndicates, how banks choose their syndicate partners and how this affects syndicate structure, loan pricing, and borrower performance. We develop a set of novel measures in terms of the distance in lending expertise with respect to both borrower industry and borrower geographic location between any two lenders and relate these measures to the organizational form of loan syndicates. We find that lead arrangers choose banks that have a similar focus in terms of lending expertise, i.e., close competitors, and give these banks more senior roles in the syndicate. We also find that these more senior syndicate members hold larger loan shares. Borrowers, especially those presenting more severe information asymmetry, benefit from such an organizational design by paying lower interest spreads. These results support the hypothesis that syndicate members that are close to lead arrangers are delegated some responsibilities such as screening and monitoring and thus can lower the overall loan syndication costs. We do not find, however, significant evidence of more effective ex-post monitoring from such a strategy based on loan default when ex-ante borrower quality and creditworthiness is taken into account. This implies that banks collaborate to pool on screening rather than monitoring.

Keywords: Syndicated loans, Networks, Bank competition, Specialization, Screening

Suggested Citation

Cai, Jian and Eidam, Frederik and Saunders, Anthony and Steffen, Sascha, Diversification or Specialization? An Analysis of Distance and Collaboration in Loan Syndication Networks (February 22, 2017). Available at SSRN: https://ssrn.com/abstract=2923150

Jian Cai

Washington University in St. Louis ( email )

Frederik Eidam

University of Mannheim ( email )

L9, 1-2
Mannheim, 68131
Germany

Centre for European Economic Research (ZEW) ( email )

L 7,1
Mannheim, 68161
Germany
+496211235330 (Phone)

Anthony Saunders

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

Sascha Steffen (Contact Author)

Frankfurt School of Finance & Management ( email )

Sonnemannstr. 9 -11
Frankfurt, 60314
Germany

HOME PAGE: http://www.sascha-steffen.de

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