Informed Lending and the Structure of Loan Syndicates - Evidence from the European Syndicated Loan Market

Abstract

In this paper, we assess the relative importance of ratings versus stock exchange listings at reducing information asymmetry using a dataset of syndicated loans to public and private firms in the U.K. for the 1996 to 2007 period. We find that the certification effect of ratings is largest for private firms and that syndicates are smallest if firms are opaque (privately held or unrated). Moreover, we find that the marginal effect of being stock exchange listed is insignificant once these firms are rated. Exploiting the heterogeneity among lenders, we find that particularly foreign bank and non-bank investors do not provide capital if firms are unrated. Our paper highlights the information produced by rating agencies as important mechanism by which ratings improve access to capital. Our results also emphasize the importance of syndicate moral hazard on the supply of uninformed capital in this market: bank-borrower relationships significantly increase the loan share syndicated to investors in high information asymmetry environments.