Contracting in the Dark: The Rise of Public-Side Lenders in the Syndicated Loan Market

Posted: 6 Oct 2021 Last revised: 4 Feb 2022

See all articles by Hami Amiraslani

Hami Amiraslani

INSEAD

John Donovan

University of Notre Dame - Department of Accountancy

Matthew Phillips

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Regina Wittenberg Moerman

University of Southern California

Date Written: January 29, 2022

Abstract

We document a novel trend in syndicated lending where some participants voluntarily waive their rights to access borrowers’ private information. The primary cost for these public-side lenders is that they are unable to use private information to evaluate borrowers’ creditworthiness. In line with this cost, we find that public-side lenders are more likely to participate in loans syndicated by reputable lead arrangers and those that include more restrictive monitoring provisions, which mitigate these lenders’ information disadvantage. The significant benefit of forgoing access to private information is the ability to avoid regulatory scrutiny associated with the potential leakage of borrowers’ private information into public securities markets. Accordingly, we find that the participation of public-side lenders is more likely when there is greater regulatory oversight of the potential misuse of private information. We further show that institutions that are less likely to have robust internal information barriers (i.e., institutional investors and small and foreign banks) are more likely to join syndicates as public-side lenders. Finally, we find that public-side lenders are positively associated with larger lending syndicates, less leakage of private information into public equity markets, and a greater likelihood and timeliness of ex-post renegotiations, consistent with important benefits to both lead arrangers and borrowers.

Keywords: public-side lenders, loan screening and monitoring, private information, information barriers, control rights, institutional lenders, syndicated lending, information asymmetry, regulatory oversight

Suggested Citation

Amiraslani, Hami and Donovan, John and Phillips, Matthew and Wittenberg Moerman, Regina, Contracting in the Dark: The Rise of Public-Side Lenders in the Syndicated Loan Market (January 29, 2022). Available at SSRN: https://ssrn.com/abstract=3908597

Hami Amiraslani

INSEAD ( email )

1 Ayer Rajah Avenue
Singapore, 138676
Singapore

John Donovan

University of Notre Dame - Department of Accountancy ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Matthew Phillips

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Regina Wittenberg Moerman (Contact Author)

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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