Information Asymmetry and Financing Arrangements: Evidence from Syndicated Loans

Abstract

I empirically explore the syndicated loan market, with an emphasis on how information asymmetry between lenders and borrowers influences syndicate structure and on which lenders become syndicate members. Consistent with moral hazard in monitoring, the lead bank retains a larger share of the loan and forms a more concentrated syndicate when the borrower requires more intense monitoring and due diligence. When information asymmetry between the borrower and lenders is potentially severe, participant lenders are closer to the borrower, both geographically and in terms of previous lending relationships. Lead bank and borrower reputation mitigates, but does not eliminate, information asymmetry problems.

Keywords: Syndicated loans, information asymmetry, distance, Dealscan, syndicate structure, bank choice

JEL Classification: G21, G24, G32, D82