Lead Arranger Reputation and the Loan Syndication Market

Abstract

What is the role of lead arranger reputation in the loan syndication market? We answer this question by examining the impact of borrower bankruptcy – which we use to identify loss of reputation – on a lead arranger’s ability to syndicate future loans. Consistent with a reduced syndication ability, there is a drop in the lead arranger’s aggregate level of activity in the loan syndication market. The lead arranger shifts lending to less risky borrowers and is more likely to include security and restrictive covenants in its loans. Controlling for loan amount and borrower fixed effects, the lead arranger syndicates loans less often and finances a larger percentage of the loans that it does syndicate. Other lenders are in general less willing to participate in the lead arranger’s syndicates, but this effect is weaker in case of lenders that have done several deals with the lead arranger in the past. The negative consequences of borrower bankruptcy are stronger for small lead arrangers and are weaker in years when several other lead arrangers also suffer borrower bankruptcy. Overall, our findings support the notion of borrower bankruptcy damaging the lead arranger’s reputation, and highlight the importance of lead arranger reputation in the loan syndication market. Our findings cannot be fully explained by alternate hypotheses that only emphasize pecuniary losses incurred by the lead arranger or poor investment prospects in the lead arranger’s area of specialization. ∗Gopalan is from the Olin Business School, Washington University; Nanda is from the W. P. Carey School of Business, Arizona State University; and Yerramilli is from the Kelley School of Business, Indiana University. Please direct all correspondence to Vijay Yerramilli (email: vyerrami@indiana.edu; phone: 812.855.2694).