Monitoring with Small Stakes

76 Pages Posted: 21 Nov 2022 Last revised: 26 May 2023

See all articles by Sheila Jiang

Sheila Jiang

University of Florida - Department of Finance, Insurance and Real Estate

Shohini Kundu

University of California, Los Angeles (UCLA) - Anderson School of Management; Centre for Economic Policy Research (CEPR)

Douglas Xu

University of Florida - Warrington College of Business Administration

Date Written: November 9, 2022

Abstract

This paper proposes a mechanism to address the issue of "monitoring with small stakes" in syndicated lending. We identify two sources that incentivize creditor monitoring: skin-in-the-game and rent extraction from renegotiation. Renegotiation-based rent extraction serves a substitute to banks' loan stake for monitoring incentives, facilitating institutional investors’ participation in syndicated lending. We use the passage of a tax policy that exogenously reduced renegotiation frictions to identify this channel. Our findings suggests that a less frictional renegotiation environment leads to more diligent monitoring, smaller bank shares in new loans and improved borrower performance, particularly in pre-existing deals with lower bank skin-in-the-game.

Keywords: contract theory, monitoring, institutional loans, cov-lite, covenants, fiscal policy, control rights, leveraged loans

JEL Classification: G21, G23, G30

Suggested Citation

Jiang, Sheila and Kundu, Shohini and Xu, Douglas, Monitoring with Small Stakes (November 9, 2022). Available at SSRN: https://ssrn.com/abstract=4271851 or http://dx.doi.org/10.2139/ssrn.4271851

Sheila Jiang (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

Shohini Kundu

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Douglas Xu

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

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