Lending When Relationships Are Scarce: The Role of Information Spread via Bank Networks

Abstract

We investigate how bank networks facilitate syndicate formation and lending in the leveraged buyout (LBO) market, where ties between banks and borrowers are scarce and borrower opacity is high. Using novel centrality measures that capture how information might flow through the network, we show that networks disseminate borrower-relevant information that influences which banks join the syndicate, the share the lead bank holds, and LBO lending terms. Further, banks’ knowledge of their network is highly localized, unrelated to their reputation, and a useful information source when ties to the borrower are lacking. Our findings emphasize the importance of information diffusion via networks for resolving asymmetric information problems during loan syndication.