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Liquidity in the pricing of syndicated loans

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  • Gupta, Anurag
  • Singh, Ajai K.
  • Zebedee, Allan A.

Abstract

We examine whether banks price expected liquidity in US syndicated term loans. Using extensive data we show that loans with higher expected liquidity have significantly lower spreads at origination, controlling for other determinants of loan spreads such as borrower, loan, syndicate and macroeconomic variables. A matched sample analysis confirms our results. We estimate that the pricing of expected liquidity results in annual savings of over $1.6 billion to the borrowers, in our sample alone. For the first time in the literature, we identify what influences the decision of financial intermediaries to make secondary markets for an asset, and the consequent pricing impact of this decision in the primary market.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Markets.

Volume (Year): 11 (2008)
Issue (Month): 4 (November)
Pages: 339-376

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Handle: RePEc:eee:finmar:v:11:y:2008:i:4:p:339-376

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Web page: http://www.elsevier.com/locate/finmar

Related research

Keywords: Syndicated loans Loan secondary market Loan pricing Liquidity Loan trading;

References

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Citations

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Cited by:
  1. Benmelech, Efraim & Dlugosz, Jennifer & Ivashina, Victoria, 2012. "Securitization without adverse selection: The case of CLOs," Journal of Financial Economics, Elsevier, vol. 106(1), pages 91-113.
  2. Max Bruche & Anatoli Segura, 2013. "Debt Maturity And The Liquidity Of Secondary Debt Markets," Working Papers wp2013_1303, CEMFI.
  3. Parlour, Christine A. & Winton, Andrew, 2013. "Laying off credit risk: Loan sales versus credit default swaps," Journal of Financial Economics, Elsevier, vol. 107(1), pages 25-45.
  4. Jian Cai, 2009. "Competition or collaboration? The reciprocity effect in loan syndication," Working Paper 0909, Federal Reserve Bank of Cleveland.
  5. Issam Hallak & Paul Schure, 2008. "Why Larger Lenders obtain Higher Returns: Evidence from Sovereign Syndicated Loans," Department Discussion Papers 0802, Department of Economics, University of Victoria.
  6. Heather Tookes & Brian Henderson, 2010. "Do Investment Banks' Relationships with Investors Impact Pricing? The Case of Convertible Bond Issues," Yale School of Management Working Papers amz2667, Yale School of Management.
  7. Ivashina, Victoria & Sun, Zheng, 2011. "Institutional stock trading on loan market information," Journal of Financial Economics, Elsevier, vol. 100(2), pages 284-303, May.
  8. Santos, João A.C. & Nigro, Peter, 2009. "Is the secondary loan market valuable to borrowers?," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(4), pages 1410-1428, November.
  9. Deuskar, Prachi & Gupta, Anurag & Subrahmanyam, Marti G., 2011. "Liquidity effect in OTC options markets: Premium or discount?," Journal of Financial Markets, Elsevier, vol. 14(1), pages 127-160, February.

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