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Investor Diversity and Loan Market Liquidity

48 Pages Posted: 14 Apr 2017  

João A. C. Santos

Federal Reserve Bank of New York

Pei Shao

University of Lethbridge

Date Written: March 6, 2017


We investigate the impact of loan ownership structure on market liquidity using detailed information from the Shared National Credit program on the portfolio of loan investors over the life of the loan. We find only weak support to existing theories showing that the presence of informed investors adversely affects liquidity. In contrast, we find strong evidence that investor diversity is beneficial to liquidity. Loans with a larger syndicate, syndicates with more investor types and with lower concentration in investor-types’ loan shares have lower bid-ask spreads. However, not all investors contribute positively to liquidity. While an increase in the number of hedge funds and pension funds in the syndicate lowers the loan bid-ask spread, an increase in the number of banks and insurance companies has the opposite effect, consistent with existing beliefs that asset managers are active traders but institutional investors follow buy-and-hold investment strategies.

Keywords: Loan Syndicate, Investor Diversity, Informed Investors, Loan Market Liquidity

JEL Classification: G14, G21, G22, G23 and G24

Suggested Citation

Santos, João A. C. and Shao, Pei, Investor Diversity and Loan Market Liquidity (March 6, 2017). Available at SSRN:

João Santos (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5583 (Phone)
212-720-8363 (Fax)


Pei Shao

University of Lethbridge ( email )

4401 University Drive
Lethbridge, Alberta T1K 3M4

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