A Spark from the Public Sector: Co-lending by Government-owned and Private-sector Lenders

Co-lending by private-sector and government-owned lenders accounts for nearly one-tenth of all syndicated-loan funding to corporate borrowers over the three decades spanning 1980 to 2010. I find evidence that private-sector institutions co-lend with government-owned lenders to benefit from better legal protection and implicit debt guarantees. This leads to loans with lower spreads, longer maturities, larger syndicates, less collateral, and a greater participation of foreign lenders, particularly for borrowers headquartered in countries with weak property rights. Yet, firms that receive loans from a mixed syndicate comprised of both private and government-owned lenders show a decline in profitability and valuation in subsequent years, which suggests that governmentowned lenders fail to efficiently allocate funding.