Lending Along the Supply Chain

Abstract

Despite the fact that economic interconnections among firms are very common, there is little research that examines the equilibrium outcome of such interconnections in credit markets. We examine how supply chain interconnections among borrowers within a lender’s loan portfolio affect equilibrium loan spread and lead arranger share in the syndicated loan market. We find that both loan spread and lead arranger share are significantly lower when the lead arranger has a pre-existing loan with the borrower’s major customer. This finding suggests that such “supply chain loans” ease syndicate participants’ moral hazard concerns more than they exacerbate concerns about adverse selection. We further document that these effects are stronger where syndicate participants’ information asymmetry concerns are more pronounced. Consistent with supply chain loans providing benefits to both the borrower and lead arranger, we provide evidence that a borrower is more likely to obtain a loan from a lender who already has an existing loan with its key customer. Our findings provide insights into the mechanisms through which supply chain interdependencies, and more generally, economic relationships, affect debt markets.