The Effect of Banks’ Financial Reporting on Syndicated Loan Structures
63 Pages Posted: 23 Oct 2018 Last revised: 31 Jan 2019
Date Written: August 1, 2018
We explore how an accounting measure of information asymmetry between lead and participating lenders influences syndication structures by examining whether lead lenders’ commercial and industrial (C&I) loan loss provision validity affects the fraction of loans they retain. Consistent with C&I provision validity reflecting banks’ underlying screening and monitoring effectiveness, we find that this measure reflects lead lender’s past relationship with borrowers and is associated positively with equity market reactions to loan announcements and future loan loss recovery rate and negatively with future large borrower bankruptcies. We then find lead lender’s loan share decreases specifically with C&I provision validity, but not with non-C&I provision validity. Consistent with an information effect, we further find that this association is attenuated by i) alternative information sources, including borrowers’ credit ratings and industry-level accounting debt contracting value and ii) by previous lead/participant relationships and participant/borrower relationships.
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