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The Pricing Effect of Certification on Bank Loans: Evidence from the Syndicated Credit Market

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  • Casolaro, Luca
  • Focarelli, Dario

    ()

  • Pozzolo, Alberto Franco

Abstract

This paper provides a direct test of banks' ability to mitigate informational asymmetries. In syndicated loans, lenders' incentive to screen ex ante and monitor ex post borrowers increases with the share they retain; consequently, the higher this share, the less risky the loan is considered by investors, and the lower is the interest rate they require. We analyze a large sample of syndicated loans arranged in over 80 countries during the nineties. We find that interest rates decrease in the share of the facility retained by the arranger. This certification effect is greater for smaller, more opaque loans where screening and monitoring are more valuable.

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Bibliographic Info

Paper provided by University of Molise, Dept. EGSeI in its series Economics & Statistics Discussion Papers with number esdp03010.

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Length: 32 pages
Date of creation: 18 Jul 2003
Date of revision:
Handle: RePEc:mol:ecsdps:esdp03010

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Keywords: Bank lending; Syndicated loans; Certification.;

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  1. Angbazo, Lazarus A. & Mei, Jianping & Saunders, Anthony, 1998. "Credit spreads in the market for highly leveraged transaction loans," Journal of Banking & Finance, Elsevier, Elsevier, vol. 22(10-11), pages 1249-1282, October.
  2. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, Elsevier, vol. 19(2), pages 217-235, December.
  3. Dario Focarelli & Fabio Panetta, 2002. "Are Mergers Beneficial to Consumers? Evidence from the Market for Bank Deposits," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 448, Bank of Italy, Economic Research and International Relations Area.
  4. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, Econometric Society, vol. 48(4), pages 817-38, May.
  5. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(4), pages 689-721, August.
  6. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  7. Gary Gorton & George Pennacchi, 1990. "Banks and Loan Sales: Marketing Non-Marketable Assets," NBER Working Papers 3551, National Bureau of Economic Research, Inc.
  8. Gary Gorton & Andrew Winton, 2002. "Financial Intermediation," NBER Working Papers 8928, National Bureau of Economic Research, Inc.
  9. Katerina Simons, 1993. "Why do banks syndicate loans?," New England Economic Review, Federal Reserve Bank of Boston, Federal Reserve Bank of Boston, issue Jan, pages 45-52.
  10. Megginson, William L & Poulsen, Annette B & Sinkey, Joseph F, Jr, 1995. "Syndicated Loan Announcements and the Market Value of the Banking Firm," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 27(2), pages 457-75, May.
  11. Dennis, Steven A. & Mullineaux, Donald J., 2000. "Syndicated Loans," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 9(4), pages 404-426, October.
  12. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, American Finance Association, vol. 32(2), pages 371-87, May.
  13. Dahiya, Sandeep & Puri, Manju & Saunders, Anthony, 2001. "Bank Borrowers and Loan Sales: New Evidence on the Uniqueness of Bank Loans," Research Papers, Stanford University, Graduate School of Business 1746, Stanford University, Graduate School of Business.
  14. Flannery, Mark J, 1986. " Asymmetric Information and Risky Debt Maturity Choice," Journal of Finance, American Finance Association, American Finance Association, vol. 41(1), pages 19-37, March.
  15. Slovin, Myron B & Sushka, Marie E & Polonchek, John A, 1993. " The Value of Bank Durability: Borrowers as Bank Stakeholders," Journal of Finance, American Finance Association, American Finance Association, vol. 48(1), pages 247-66, March.
  16. Smith, Clifford Jr. & Warner, Jerold B., 1979. "On financial contracting : An analysis of bond covenants," Journal of Financial Economics, Elsevier, Elsevier, vol. 7(2), pages 117-161, June.
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Cited by:
  1. Mark Carey & Greg Nini, 2004. "Is the corporate loan market globally integrated? a pricing puzzle," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 813, Board of Governors of the Federal Reserve System (U.S.).
  2. Mark Pyles & Donald Mullineax, 2008. "Constraints on Loan Sales and the Price of Liquidity," Journal of Financial Services Research, Springer, Springer, vol. 33(1), pages 21-36, February.
  3. Adam B. Ashcraft & João A. C. Santos, 2007. "Has the credit derivatives swap market lowered the cost of corporate debt?," Staff Reports, Federal Reserve Bank of New York 290, Federal Reserve Bank of New York.

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