Strategic Syndication: Is Bad News Shared in Loan Syndicates?

Review of Accounting Studies (Forthcoming)

58 Pages Posted: 23 Sep 2020 Last revised: 9 Mar 2022

See all articles by Andrea K. Down

Andrea K. Down

University of Toronto - Rotman School of Management

Christopher D. Williams

University of Michigan, Stephen M. Ross School of Business

Regina Wittenberg Moerman

University of Southern California

Date Written: March 1, 2022

Abstract

We investigate whether lead arrangers opportunistically withhold their private information from participant lenders and how this behavior affects the structure of loan syndicates. Using the setting of Food and Drug Administration (FDA) inspections and the exogenous shock to the inspection disclosure regime with the passage of the Open Government Initiative (OGI), we show that following bad inspection outcomes lead arrangers retain a larger loan share in the post-OGI period, when inspection outcomes are publicly disclosed by the FDA, compared to the pre-OGI period, when there is no public disclosure. We also find that during the pre-OGI period lead arrangers retain a lower loan share when a loan is issued following bad inspection outcomes compared to clean inspection outcomes. This effect is stronger when lead arrangers are more likely to be informed (as measured by their prior experience submitting Freedom of Information Act (FOIA) requests to the FDA and a higher inspection materiality) and when syndicate participants are less likely to be informed (as measured by the lack of their prior FDA FOIA requests, lead arranger experience, and the lack of borrowers’ voluntary disclosure of inspection outcomes). Our findings of the deterioration in borrowers’ performance following bad inspection outcomes and lead arrangers’ reputational losses in the post-OGI period further indicate lead arrangers’ opportunistic behavior. Overall, our results provide robust evidence that lead arrangers exploit their informational advantage at the expense of participant lenders.

Keywords: Syndicated loan market, Lead arrangers, Disclosure, FDA, Informational advantage, Syndicate participants

JEL Classification: D82, D83, G21, I18

Suggested Citation

Down, Andrea K. and Williams, Christopher D. and Wittenberg Moerman, Regina, Strategic Syndication: Is Bad News Shared in Loan Syndicates? (March 1, 2022). Review of Accounting Studies (Forthcoming), Available at SSRN: https://ssrn.com/abstract=3670397 or http://dx.doi.org/10.2139/ssrn.3670397

Andrea K. Down

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Christopher D. Williams

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
(734)647-2842 (Phone)

Regina Wittenberg Moerman (Contact Author)

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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