Abstract
In this paper, I exploit the syndicated loan market to explore the impact of information asymmetry on the cost of debt capital. As a measure of information asymmetry associated with a borrowing firm, I use the bid-ask spread on the firm’s loans traded on the secondary loan market. I find that a higher bid-ask spread on a borrower’s traded loans leads to a higher interest rate on the borrower’s subsequently issued loans. I show that both information asymmetry between syndicate lenders and a borrowing firm and information asymmetry among secondary loan market participants are priced in the loan interest rate. I also find that information asymmetry decreases debt maturity. I show that a higher bid-ask spread on the borrower’s traded loans translates into a shorter maturity of the borrower’s subsequently issued loans.
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