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Domestic lead arranger certification and the pricing of project finance loans

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  • Frederick S. Ahiabor
  • Gregory A. James

Abstract

Using a sample of 1,270 project finance syndicated loan tranches arranged from 1998 to 2011 and worth over $300 billion, we estimate the causal impact of certification by domestic lead arrangers on the pricing of project finance loans in emerging markets. We hypothesize that, on average, domestic arrangers are better able to structure and screen project finance deals, credibly communicate the true value of a project and its underlying network of contracts, and monitor the loan contract compared with foreign arrangers. If so, all things being equal, domestic arranger certification should result in lower loan spreads compared with foreign arranger certification. Our results support this hypothesis. After controlling for project and loan characteristics and the potential endogeneity of the lead arranger's selection, we find that certification by domestic arrangers causes a significant reduction in loan spreads across different industrial categories and geographic locations of projects. This finding demonstrates the economic value of domestic arranger certification in project finance lending. Our results suggest that, in the presence of information asymmetry between project sponsors and participant lenders in the syndicate, certification by domestic arrangers offers a superior mechanism to minimize search, information, and monitoring costs.

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  • Frederick S. Ahiabor & Gregory A. James, 2019. "Domestic lead arranger certification and the pricing of project finance loans," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 24(1), pages 150-167, January.
    • Handle: RePEc:wly:ijfiec:v:24:y:2019:i:1:p:150-167
    DOI: 10.1002/ijfe.1654
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    Cited by:

    1. McHugh, Christopher A., 2023. "Competitive conditions in development finance," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 83(C).
    2. Pengran Zhou & Pengfei Zhou & Serhat Yüksel & Hasan Dinçer & Gülsüm Sena Uluer, 2019. "Balanced Scorecard-Based Evaluation of Sustainable Energy Investment Projects with IT2 Fuzzy Hybrid Decision Making Approach," Energies, MDPI, vol. 13(1), pages 1-20, December.

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