Why Borrowers Pay Premiums to Larger Lenders: Empirical Evidence from Sovereign Syndicated Loans

33 Pages Posted: 24 Jul 2003

See all articles by Issam Hallak

Issam Hallak

European Commission Joint Research Center; KU Leuven - Faculty of Business and Economics (FEB)

Date Written: June 2003

Abstract

All other terms being equal (e.g. seniority), syndicated loan contracts provide larger lending compensations (in percentage points) to institutions funding larger amounts. This paper explores empirically the motivation for such a price design on a sample of sovereign syndicated loans in the period 1990-1997. I find strong evidence that a larger premium is associated with higher renegotiation probability and information asymmetries. It hardly has any impact on the number of lenders though. This is consistent with the hypothesis that larger lenders act as main lenders, namely help reduce information asymmetries and provide services in situations of liquidity shortage. This constitutes new evidence of the existence of compensations for such unique services. Moreover, larger payment discrepancies are also associated with larger syndicated loan amounts. This provides further new evidence that larger borrowers bear additional borrowing costs.

Keywords: Relationship Lending, Number of Lenders, Syndicated Loans, Sovereign Debt

JEL Classification: F34, G21, G33

Suggested Citation

Hallak, Issam, Why Borrowers Pay Premiums to Larger Lenders: Empirical Evidence from Sovereign Syndicated Loans (June 2003). EFA 2003 Annual Conference Paper No. 857. Available at SSRN: https://ssrn.com/abstract=424321 or http://dx.doi.org/10.2139/ssrn.424321

Issam Hallak (Contact Author)

European Commission Joint Research Center ( email )

1049
Belgium

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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