Why Larger Lenders Obtain Higher Returns: Evidence from Sovereign Syndicated Loans

Abstract

Lenders who make large funding commitments earn higher rates of return than those who make smaller commitments. We analyze a data set of sovereign syndicated loan contracts to document study and this phenomenon. We show that the “large lenders” in the lending syndicates earn a “return premium,” which is positively affected by the likelihood of future liquidity problems of the borrower. This finding suggests that the onus would be on the large lenders in particular to provide services, such as liquidity insurance and coordinating the workout. The return premium also increases in the fraction of banks among the larger syndicate members, suggesting that banks are special lenders in terms of addressing idiosyncratic liquidity problems.