ESSAYS ON THE SYNDICATED LOAN MARKET

Abstract

The syndicated loan is become more and more important for firm's financing. We study three important aspects of loan syndication: the lead arranger's reputation effect on syndicated loan pricing, the switching behavior for repeat syndicate loans and the effect of country-specific bank-firm ownership structure on syndicated loan pricing and bank-firm relationship of repeat loans. The first chapter analyzes the reputation effect of the lead arranger on syndicated loan pricing, based on a sample of loan facilities to non-financial U.S. firms over the 1994-2006 period. Theory suggests that the reputation/spread relationship should generally be positive because more reputable lenders usually employ more costly loan screening and monitoring techniques and therefore must be compensated with a higher spread. After controlling for endogeneity in lender-borrower matching, the empirical results show that the reputable arrangers charge a "reputation premium" for monitoring and due diligence, and the commitment against extracting the information rent from borrowers. The results also show that the less-reputable arrangers offer a "reputation discount", since the market competition from both the loan market and bond market makes it more difficult for less reputable arrangers to sustain the reputation mechanism. In addition, the reputation effect on pricing becomes less significant when the borrower enters a repeat loan relationship with a prior or existing lender. Finally, the study finds that the arranger's reputation can reduce the lead share retained by the lead arranger in its loan portfolio, which serves as evidence that reputation also mitigates the information asymmetry between the lead arranger and participant banks. The second chapter analyzes the switching behavior for two types of repeat loans: migrating loans that remain within the same bank reputation class and loans migrating to a different reputation class. The theoretical literature argues that banks (lenders) and firms (borrowers) benefit from entering into a relationship-lending arrangement. In the syndicated loan market, however, it is very common for repeat loans to switch from one bank to another. We present a model that establishes conditions for implementing empirical investigations relating to relationship lending and the characteristics of the separating equilibrium in the loan market. Using explanatory variables describing firms, loans, and loan syndicates, we find that lending within the high quality bank sector reveals evidence that is consistent with relationship lending. That is, some firms forego longer maturity loans and less oversight to remain with their original lender. A similar finding does not hold for repeat lending in the lower quality bank sector. Regarding loans that migrate in either direction between the high and low quality banking sectors, firm risk is the most important determinant. Relatively riskier firms move down to lower quality lenders while relatively safer firms move up to higher quality lenders. The third chapter investigates the determinants of loan pricing and repeat loan relationship for a sample of 6,180 non-U.S.. firm-loan observations for the period 1998-2007. This paper focuses on the relation between a country-specific governance indicator and country-specific bank-firm ownership structures on loan pricing and the management of a lending relationship between the syndicate bank and firm. We evaluate the relationship between country-specific bank ownership structure and the main characteristics of loan, which are mainly measured by loan pricing and loan switching decision. The paper examines three interrelated questions: 1.How is loan pricing affected by country-specific bank-firm ownership structure? 2. Does country-specific bank-firm ownership structure influence the decision to switch lenders in the repeat loan market? 3. Is country-specific bank-firm ownership structure more important for a borrower to migrate to a higher reputation lender than to a lower reputation lender? We use loan-characteristic, bank-characteristic, and firm-characteristic variables as well as country-specific corruption and country-specific bank-firm ownership structure variables to explore the effect on loan pricing and loan-switching decisions. Using logistic regression analysis, we find that loan switching is less likely for firms when the bank controls the firm, especially in the case of a bank-controlled firm borrows from a low reputation syndicated loan lender. However, when the firm controls a local bank, there is no impact on the firm's switching decision in the syndicated loan market. The bank-controlling firm is as likely to switch as a firm that does not control a bank even though the firm is more opaque to the financial market. Our results suggest that in the international syndicated loan market, the bank-firm relationship is partly shaped by country-specific characteristics and information asymmetry of firms to the financial market. These chapters explores the bank and firm behavior in the syndicated loan market and make the contribution to the literature by offering further knowledge and deeper understanding about the bank-firm relationship and behavior in the loan syndication structure.