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The pricing effect of certification on bank loans: evidence from the syndicated credit market

Author

Listed:
  • Luca Casolaro
  • Dario Focarelli
  • Alberto F. Pozzolo

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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Suggested Citation

  • Luca Casolaro & Dario Focarelli & Alberto F. Pozzolo, 2003. "The pricing effect of certification on bank loans: evidence from the syndicated credit market," Proceedings 864, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhpr:864
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    Cited by:

    1. Karima Bouaiss & Catherine Refait-Alexandre, 2009. "La structure des crédits syndiqués comme défense contre les problèmes informationnels - Une analyse empirique sur le marché français," Revue Finance Contrôle Stratégie, revues.org, vol. 12(2), pages 35-68, June.
    2. Focarelli, Dario & Pozzolo, Alberto Franco & Casolaro, Luca, 2008. "The pricing effect of certification on syndicated loans," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 335-349, March.
    3. Herve Alexandre & Karima Bouaiss & Catherine Refait-Alexandre, 2010. "Does a banking relationship help a firm on the syndicated loans market in a time of financial crisis?," Working Papers halshs-00538328, HAL.
    4. Mark Pyles & Donald Mullineax, 2008. "Constraints on Loan Sales and the Price of Liquidity," Journal of Financial Services Research, Springer;Western Finance Association, vol. 33(1), pages 21-36, February.
    5. David VanHoose, 2006. "Capital Regulation and Loan Monitoring in a Diverse Banking System," NFI Policy Briefs 2006-PB-13, Indiana State University, Scott College of Business, Networks Financial Institute.
    6. repec:dau:papers:123456789/8559 is not listed on IDEAS
    7. Ningzhong Li, 2010. "Negotiated Measurement Rules in Debt Contracts," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 48(5), pages 1103-1144, December.
    8. Gupta, Anurag & Singh, Ajai K. & Zebedee, Allan A., 2008. "Liquidity in the pricing of syndicated loans," Journal of Financial Markets, Elsevier, vol. 11(4), pages 339-376, November.
    9. Mark Carey & Greg Nini, 2007. "Is the Corporate Loan Market Globally Integrated? A Pricing Puzzle," Journal of Finance, American Finance Association, vol. 62(6), pages 2969-3007, December.
    10. Adam B. Ashcraft & João A. C. Santos, 2007. "Has the credit derivatives swap market lowered the cost of corporate debt?," Staff Reports 290, Federal Reserve Bank of New York.

    More about this item

    Keywords

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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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