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Within‐syndicate conflicts, loan covenants, and syndicate formation
Author(s) -
Dass Nishant,
Nanda Vikram,
Wang Qinghai
Publication year - 2019
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/fima.12270
Subject(s) - syndicate , loan , syndicated loan , business , equity (law) , covenant , financial system , monetary economics , finance , economics , law , political science
We study how conflicts within a lending syndicate affect loan contract and syndicate formation. We argue that loan provisions serve an important dual function: In addition to moderating borrower–lender conflicts, they reduce within‐syndicate conflicts. We show that greater potential for within‐syndicate conflicts is associated with more and stricter covenants. Loans are less restrictive when the interests of participants and the lead arrangers are better aligned, for example, when participant–banks have stronger relationships with the lead arranger or hold borrower's equity (indirectly). Overall, our results show that covenant choice, syndicate formation, and lead arranger's loan allocation all play an important role in reducing within‐syndicate conflicts.