Diversified Syndicate Structure and Loan Spreads for Non-U.S. Firms

Syndicated lending allows participant banks to offer larger loans for longer tenors. A diversified syndicate structure, which includes both domestic and foreign banks, can aid in reducing their risk and alleviate information asymmetry in loan contracting. Using cross-country data on syndicated loans obtained by non-U.S. firms, we find that a diversified syndicate structure is associated with lower loan spreads for riskier borrowers compared to loans made by non-diversified syndicates. We also find that the positive effect of a diversified syndicate on loan terms is more pronounced during periods of greater economic policy uncertainty, when information asymmetry tends to be higher. The baseline findings hold across subsamples of the data and are robust to alternative specifications and controls for selection effects. Our findings provide evidence on the benefits of a diversified syndicate structure in mitigating screening and monitoring costs in bank lending.