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Why Larger Lenders obtain Higher Returns: Evidence from Sovereign Syndicated Loans

Lenders that fund larger shares of a syndicated loan typically receive larger percentage upfront fees than smaller lenders. This paper studies sovereign syndicated loan contracts in the period 1982-2006 to explore this fact. In our dataset of 288 contracts large lenders obtain on average an 8.5 percent higher return on their funds than small lenders who join the syndicate. Our analysis shows that the return premium large lenders receive is positively affected by anticipated future liquidity problems of the borrower and by the number of banks. Our analysis also reveals that the return premium is not used to control the number of banks that join the syndicate. We interpret our findings as indicating that the fee structure on syndicated loans incorporates anticipated costs associated with a borrower illiquidity, notably the costs of coordinating the workout and providing liquidity insurance, but that the fee structure does not serve the additional purpose of curbing these costs by reducing the number of lenders in the syndicate.

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Paper provided by Department of Economics, University of Victoria in its series Department Discussion Papers with number 0802.

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Length: 38 pages
Date of creation: 31 Dec 2008
Date of revision:
Handle: RePEc:vic:vicddp:0802
Note: ISSN 1914-2838
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  24. Pegaret Pichler, 2001. "A Theory of the Syndicate: Form Follows Function," Journal of Finance, American Finance Association, vol. 56(6), pages 2237-2264, December.
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  26. Ciarlone, Alessio & Piselli, Paolo & Trebeschi, Giorgio, 2009. "Emerging markets' spreads and global financial conditions," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(2), pages 222-239, April.
  27. Carletti, Elena, 2004. "The structure of bank relationships, endogenous monitoring, and loan rates," Journal of Financial Intermediation, Elsevier, vol. 13(1), pages 58-86, January.
  28. 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.
  29. Amir Sufi, 2007. "Information Asymmetry and Financing Arrangements: Evidence from Syndicated Loans," Journal of Finance, American Finance Association, vol. 62(2), pages 629-668, 04.
  30. Bharath, Sreedhar & Dahiya, Sandeep & Saunders, Anthony & Srinivasan, Anand, 2007. "So what do I get? The bank's view of lending relationships," Journal of Financial Economics, Elsevier, vol. 85(2), pages 368-419, August.
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