Underwriting and Primary Market Price Discovery of Syndicated Loans: Theory and Evidence

68 Pages Posted: 27 Apr 2018 Last revised: 23 Aug 2021

See all articles by Donghang Zhang

Donghang Zhang

University of South Carolina

Yafei Zhang

University of South Carolina - Darla Moore School of Business

Yijia (Eddie) Zhao

University of Massachusetts Boston - College of Management

Date Written: September 10, 2020

Abstract

Syndicated loan offerings exhibit U-shaped underpricing. We develop a model of loan underwriting that incorporates the lead bank’s loan retention to explain this phenomenon. The bank partially adjusts the offer price for “hot” loans with strong demand, resulting in underpricing to induce investors to reveal positive information. The bank retains “cold” loans with weak demand and underprices them to compensate for its retention cost. In equilibrium, the bank’s retention of cold loans mitigates investors’ false-reporting incentive and in turn reduces the need for hot loan underpricing, which leads to lower overall underpricing. Greater bank capital reduces retention costs and alleviates underpricing. Empirical evidence supports the model.

Keywords: Syndicated loans, Universal banking, Loan underwriting, Underpricing, Bank capital

JEL Classification: G14, G21, G24, G38

Suggested Citation

Zhang, Donghang and Zhang, Yafei and Zhao, Yijia, Underwriting and Primary Market Price Discovery of Syndicated Loans: Theory and Evidence (September 10, 2020). Available at SSRN: https://ssrn.com/abstract=3159471 or http://dx.doi.org/10.2139/ssrn.3159471

Donghang Zhang (Contact Author)

University of South Carolina ( email )

1014 Greene Street
Darla Moore Sch
Columbia, SC SC 29208
United States
8037770242 (Phone)
29208 (Fax)

HOME PAGE: http://https://sc.edu/study/colleges_schools/moore/directory/zhang_donghang.php

Yafei Zhang

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States

Yijia Zhao

University of Massachusetts Boston - College of Management ( email )

100 Morrissey Blvd.
Boston, MA 02125
United States

HOME PAGE: http://sites.google.com/view/eddie-zhao/home

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