42 Pages Posted: 27 Jul 2018 Last revised: 25 Oct 2018
Date Written: October 2018
We provide evidence that large creditors exert a governing influence over corporate borrowers outside of covenant (technical) violation and payment default states. We show that, subsequent to syndicated loan origination, borrowers decrease capital inefficiencies, increase investments in productive assets, and improve operating performance relative to non-issuers. When firms are more opaque, syndicates are more concentrated in that lead arrangers hold a greater percentage of loan shares. We present evidence that creditor influence is increasing in the percentage of the deal retained by the lead arranger. Equity holders benefit from creditor influence subsequent to loan origination; cumulative abnormal stock returns around loan origination are positive and significant. These findings are robust to technical violations and shareholder governance. When creditor positions are more concentrated, creditor governance effects are of the same sign and magnitude as those provided by concentrated equity positions.
Keywords: syndicated loan, corporate governance, creditor governance, operating performance
JEL Classification: G21, G32, G33, G34
Suggested Citation: Suggested Citation