Abstract
AbstractBank loans are an important financing component for large‐scale investment projects. To secure loans, firms often enlist the help of a financial advisor (investment bank, boutique firm). Increasingly, large banks offer both advisory and arranging services. This dual role lowers information asymmetry, according to relationship banking, but suggests a potential conflict of interest. We investigate these trade‐offs and their effects for lenders and borrowers. Using a rich database of project‐specific loans and accounting for possible endogeneity, we find that loan spreads, debt levels, and maturities tend to be higher when the arranger also advises. Our results are consistent with relationship banking. Lenders benefit from better information and monopolistic power, whereas borrowers benefit from lower refinancing risk, higher financial flexibility, and a greater likelihood of financing (i.e., greater credit availability).
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