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The value of repeat lending

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  • Blaise Gadanecz
  • Alper Kara
  • Philip Molyneux

Abstract

The unique structure of syndicated lending results in information asymmetries within the lending syndicate between banks of varying degrees of seniority. While previous studies have attempted to use indirect proxy measures to capture the effects of such information asymmetries, in this paper we propose a more direct measure. This offers new insights into how junior and senior banks rely on their own and each other's information sets in lending syndicates. In particular, we look at the previous number of borrowing/lending relationships between individual borrowers and lenders and the duration of these interactions. Using this new, direct and explicit measure on a sample of 5,842 syndicated loan transactions between 1993 and 2006, we find that when participant banks have information inferiority in the syndicate they require higher loan spreads to compensate for this asymmetry. This is amplified when the borrowers are more opaque. We thus show how junior participant banks with repeat relationships with the same borrower graduate from uniformed to informed lenders (the spread goes down as asymmetry diminishes) and how they rely both on the arranger's reputation and their own repeat experience with the borrower.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 350.

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Length: 29 pages
Date of creation: Jul 2011
Date of revision:
Handle: RePEc:bis:biswps:350

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Keywords: syndicated loans; repetitive lending; arranger opportunistic behaviour; arranger reputation; opaque borrowers;

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References

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  1. de Haas, Ralph & van Horen, Neeltje, 2009. "The strategic behavior of banks during a financial crisis; evidence from the syndicated loan market," MPRA Paper 14164, University Library of Munich, Germany.
  2. Amir Sufi, 2007. "Information Asymmetry and Financing Arrangements: Evidence from Syndicated Loans," Journal of Finance, American Finance Association, American Finance Association, vol. 62(2), pages 629-668, 04.
  3. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 68(3), pages 351-81, July.
  4. Esty, Benjamin C. & Megginson, William L., 2003. "Creditor Rights, Enforcement, and Debt Ownership Structure: Evidence from the Global Syndicated Loan Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 38(01), pages 37-60, March.
  5. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 9(1), pages 7-25, January.
  6. Ingo Fender & Janet Mitchell, 2009. "The future of securitisation: how to align incentives," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, September.
  7. Champagne, Claudia & Kryzanowski, Lawrence, 2007. "Are current syndicated loan alliances related to past alliances?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 31(10), pages 3145-3161, October.
  8. Ugo Albertazzi & Ginette Eramo & Leonardo Gambacorta & Carmelo Salleo, 2011. "Securitization is not that evil after all," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 796, Bank of Italy, Economic Research and International Relations Area.
  9. Kamphol Panyagometh & Gordon S. Roberts, 2010. "Do Lead Banks Exploit Syndicate Participants? Evidence from Ex Post Risk," Financial Management, Financial Management Association International, Financial Management Association International, vol. 39(1), pages 273-299, 03.
  10. Dennis, Steven A. & Mullineaux, Donald J., 2000. "Syndicated Loans," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 9(4), pages 404-426, October.
  11. Ivashina, Victoria, 2009. "Asymmetric information effects on loan spreads," Journal of Financial Economics, Elsevier, Elsevier, vol. 92(2), pages 300-319, May.
  12. Campbell, Tim S & Kracaw, William A, 1980. " Information Production, Market Signalling, and the Theory of Financial Intermediation," Journal of Finance, American Finance Association, American Finance Association, vol. 35(4), pages 863-82, September.
  13. Focarelli, Dario & Pozzolo, Alberto Franco & Casolaro, Luca, 2008. "The pricing effect of certification on syndicated loans," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(2), pages 335-349, March.
  14. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(3), pages 393-414, July.
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