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Institutional demand pressure and the cost of corporate loans

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  • Ivashina, Victoria
  • Sun, Zheng

Abstract

Between 2001 and 2007, annual institutional funding in highly leveraged loans went up from $32 billion to $426 billion, accounting for nearly 70% of the jump in total syndicated loan issuance over the same period. Did the inflow of institutional funding in the syndicated loan market lead to mispricing of credit? To understand this relation, we look at the institutional demand pressure defined as the number of days a loan remains in syndication. Using market-level and cross-sectional variation in time-on-the-market, we find that a shorter syndication period is associated with a lower final interest rate. The relation is robust to the use of institutional fund flow as an instrument. Furthermore, we find significant price differences between institutional investors' tranches and banks' tranches of the same loans, even though they share the same underlying fundamentals. Increasing demand pressure causes the interest rate on institutional tranches to fall below the interest rate on bank tranches. Overall, a one-standard-deviation reduction in average time-on-the-market decreases the interest rate for institutional loans by over 30 basis points per annum. While this effect is significantly larger for loan tranches bought by collateralized debt obligations (CDOs), it is not fully explained by their role.

Suggested Citation

  • Ivashina, Victoria & Sun, Zheng, 2011. "Institutional demand pressure and the cost of corporate loans," Journal of Financial Economics, Elsevier, vol. 99(3), pages 500-522, March.
  • Handle: RePEc:eee:jfinec:v:99:y:2011:i:3:p:500-522
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    Cited by:

    1. Colla, Paolo & Ippolito, Filippo & Wagner, Hannes F., 2012. "Leverage and pricing of debt in LBOs," Journal of Corporate Finance, Elsevier, vol. 18(1), pages 124-137.
    2. Benmelech, Efraim & Dlugosz, Jennifer & Ivashina, Victoria, 2012. "Securitization without adverse selection: The case of CLOs," Journal of Financial Economics, Elsevier, vol. 106(1), pages 91-113.
    3. Demiroglu, Cem & James, Christopher, 2015. "Bank loans and troubled debt restructurings," Journal of Financial Economics, Elsevier, vol. 118(1), pages 192-210.
    4. Gong, Di & Wagner, Wolf, 2016. "Systemic risk-taking at banks: Evidence from the pricing of syndicated loans," CEPR Discussion Papers 11150, C.E.P.R. Discussion Papers.
    5. Daniel Covitz & Nellie Liang & Tobias Adrian, 2015. "Financial Stability Monitoring," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 357-395, December.
    6. Lim, Jongha & Minton, Bernadette A. & Weisbach, Michael S., 2014. "Syndicated loan spreads and the composition of the syndicate," Journal of Financial Economics, Elsevier, vol. 111(1), pages 45-69.
    7. Aramonte, Sirio & Lee, Seung Jung & Stebunovs, Viktors, 2015. "Risk Taking and Low Longer-term Interest Rates: Evidence from the U.S. Syndicated Loan Market," Finance and Economics Discussion Series 2015-68, Board of Governors of the Federal Reserve System (U.S.).
    8. Nadauld, Taylor D. & Weisbach, Michael S., 2012. "Did securitization affect the cost of corporate debt?," Journal of Financial Economics, Elsevier, vol. 105(2), pages 332-352.
    9. Dezső, Cristian L. & Ross, David Gaddis, 2012. "Are banks happy when managers go long? The information content of managers’ vested option holdings for loan pricing," Journal of Financial Economics, Elsevier, vol. 106(2), pages 395-410.
    10. Seth Armitage & Dionysia Dionysiou & Angelica Gonzalez, 2014. "Are the Discounts in Seasoned Equity Offers Due to Inelastic Demand?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(5-6), pages 743-772, June.
    11. Massa, Massimo & Yasuda, Ayako & Zhang, Lei, 2013. "Supply uncertainty of the bond investor base and the leverage of the firm," Journal of Financial Economics, Elsevier, vol. 110(1), pages 185-214.
    12. Franke, Günter & Krahnen, Jan Pieter, 2017. "SME funding without banks? On the interplay of banks and markets," SAFE White Paper Series 44, Goethe University Frankfurt, Research Center SAFE - Sustainable Architecture for Finance in Europe.
    13. Helmut Elsinger & Robert Köck & Marcel Kropp & Walter Waschiczek, 2016. "Corporate financing in Austria in the run-up to capital markets union (This study is also available in German)," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 31, pages 96-119.
    14. Li, Yutao & Saunders, Anthony & Shao, Pei, 2015. "Did Regulation Fair Disclosure affect credit markets?," Journal of Banking & Finance, Elsevier, vol. 54(C), pages 46-59.
    15. Berg, Tobias & Saunders, Anthony & Steffen, Sascha & Streitz, Daniel, 2016. "Mind the gap: The difference between U.S. and European loan rates," ZEW Discussion Papers 16-018, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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