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Asymmetric information effects on loan spreads

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  • Ivashina, Victoria
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    Abstract

    This paper estimates the cost arising from information asymmetry between the lead bank and members of the lending syndicate. In a lending syndicate, the lead bank retains only a fraction of the loan but acts as the intermediary between the borrower and the syndicate participants. Theory predicts that asymmetric information will cause participants to demand a higher interest rate and that a large loan ownership by the lead bank should reduce this effect. In equilibrium, however, the asymmetric information premium demanded by participants is offset by the diversification premium demanded by the lead. Using shifts in the idiosyncratic credit risk of the lead bank's loan portfolio as an instrument, I measure the asymmetric information effect of the lead's share on the loan spread and find that it accounts for approximately 4% of the total cost of credit.

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    Bibliographic Info

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

    Volume (Year): 92 (2009)
    Issue (Month): 2 (May)
    Pages: 300-319

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    Handle: RePEc:eee:jfinec:v:92:y:2009:i:2:p:300-319

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Information asymmetry Syndicated loans Cost of capital;

    References

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