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Bank reputation in the private debt market

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  • McCahery, Joseph
  • Schwienbacher, Armin

Abstract

We examine the impact of lead arrangers' reputation on the design of loan contracts such as spread and fees charged. Controlling for the non-randomness of the lender-borrower match (self-selection bias), we find that the reputation of top tier arrangers leads to higher spreads, and that top tier arrangers retain larger fractions of their loans in their syndicates. These larger spreads are especially pronounced for borrowers without credit rating that have the most to gain from the certification assumed by virtue of a loan contract with a top tier arranger. This certification channel differs from the one found in public markets, where certification leads to a reduced spread offered to the best clients. These differences between public and private markets can be explained by differences in the way they operate and are structured. Interestingly, the effect is strongest for transactions done after the changes in the banking regulations (including the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994) that led to significant consolidations in the banking industry, including among the largest commercial banks.

Suggested Citation

  • McCahery, Joseph & Schwienbacher, Armin, 2010. "Bank reputation in the private debt market," Journal of Corporate Finance, Elsevier, vol. 16(4), pages 498-515, September.
  • Handle: RePEc:eee:corfin:v:16:y:2010:i:4:p:498-515
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    Cited by:

    1. Campbell, Randall C. & Nagel, Gregory L., 2016. "Private information and limitations of Heckman's estimator in banking and corporate finance research," Journal of Empirical Finance, Elsevier, vol. 37(C), pages 186-195.
    2. Rosenfeld, Claire M., 2014. "The effect of banking relationships on the future of financially distressed firms," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 403-418.
    3. Liqiang Chen, 2014. "CEO Risk-taking Incentives and Bank Loan Syndicate Structure," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(9-10), pages 1269-1308, November.
    4. Andres, Christian & Betzer, André & Limbach, Peter, 2014. "Underwriter reputation and the quality of certification: Evidence from high-yield bonds," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 97-115.
    5. Vu, Tram & Do, Viet & Skully, Michael, 2015. "Local versus foreign banks: A home market advantage in loan syndications," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 29-39.
    6. Joseph McCahery & Erik Vermeulen, 2012. "Private equity regulation: a comparative analysis," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 16(2), pages 197-233, May.
    7. repec:eee:corfin:v:45:y:2017:i:c:p:176-202 is not listed on IDEAS
    8. Christophe J. GODLEWSKI, 2017. "Initial conditions and the private debt renegotiation process," Working Papers of LaRGE Research Center 2017-03, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    9. Fernando, Chitru S. & Gatchev, Vladimir A. & May, Anthony D. & Megginson, William L., 2015. "Prestige without purpose? Reputation, differentiation, and pricing in U.S. equity underwriting," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 41-63.
    10. Christian Andres & André Betzer & Peter Limbach, 2013. "Underwriter Reputation and the Quality of Certification: Evidence from High-Yield Bonds," Schumpeter Discussion Papers SDP13006, Universitätsbibliothek Wuppertal, University Library.

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