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Do Lead Banks Exploit Syndicate Participants? Evidence from Ex Post Risk
Author(s) -
Panyagometh Kamphol,
Roberts Gordon S.
Publication year - 2010
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/j.1755-053x.2010.01073.x
Subject(s) - syndicate , web syndication , business , exploit , loan , proxy (statistics) , financial system , private information retrieval , syndicated loan , finance , venture capital , statistics , computer security , mathematics , machine learning , computer science
Loan syndication involves a repeated game between lead banks and syndicate members. Lead banks do not use their private information to exploit syndicate participants but rather focus on accurately certifying loan quality. Using borrowers' financial ratios (shifts in Altman's Z scores) after origination to proxy for bank private information, we find that lead banks syndicate larger proportions of loans that subsequently do not experience lower Z scores. Performance pricing covenants under which borrowers commence to pay higher spreads if ratios (or credit ratings) deteriorate constitute a positive signal reducing agency costs and are associated with higher proportions of syndication.