The Cost of Intermediary Market Power for Distressed Borrowers

81 Pages Posted: 25 Jul 2022 Last revised: 14 Feb 2023

See all articles by Winston Wei Dou

Winston Wei Dou

The Wharton School, University of Pennsylvania; National Bureau of Economic Research (NBER)

Wei Wang

Queen's University - Smith School of Business

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance

Date Written: October 25, 2022

Abstract

In the loan markets for distressed corporate borrowers, a few specialized lenders finance a large fraction of loans. Ultra-high yield spreads prevail even after removing the credit- and liquidity-risk component. Borrowers are in desperate need of financing but face limited funding options, while specialized lenders have repeated syndication relations with restrained participation. We develop and estimate a dynamic game-theoretic model, accounting for strategic competition, endogenous collusion capacity, endogenous participation, and latent heterogeneity. Lender market power accounts for 76 - 96% of the risk-adjusted yield spreads, with a significant fraction attributable to collusion. Smaller borrowers are more susceptible to lender market power. Importantly, both specialized lenders and distressed borrowers would be worse off if collusion is completely prohibited, suggesting that vigorous antitrust policies can be efficiency retarding.

Keywords: Collusion in Syndication, Blocking Power, Agency Conflicts, Intermediary Asset Pricing, Likelihood-Based Estimation, Latent Demand Shifts.

JEL Classification: G12, G23, G30, L13

Suggested Citation

Dou, Winston Wei and Wang, Wei and Wang, Wenyu, The Cost of Intermediary Market Power for Distressed Borrowers (October 25, 2022). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=4163319 or http://dx.doi.org/10.2139/ssrn.4163319

Winston Wei Dou (Contact Author)

The Wharton School, University of Pennsylvania ( email )

2318 Steinberg Hall - Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

HOME PAGE: http://finance-faculty.wharton.upenn.edu/wdou/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org/people/winston_wei_dou?page=1&perPage=50

Wei Wang

Queen's University - Smith School of Business ( email )

Queen's University-Smith School of Business
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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