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