Concentrated Syndicate Research Articles

Attention to alliances: The role of attention, relational embeddedness, and concentrated governance in the success of U.S. venture capital syndicates

Extending the Attention-based View (ABV) to firms’ alliances, this study examines the relationship between the degree of attention to a focal alliance by alliance members and its success. We also examine how two contextual factors of collaboration, relational embeddedness and concentration of governance, affect this relationship in the context of U.S. venture capital syndicates. We find that attention increases the chances of syndicate success, that relational embeddedness of partners enhances the positive effect of attention, and that concentrated syndicate governance negatively moderates the effect of attention. This study joins the nascent stream of literature that emphasizes the importance of organizational factors in outcomes of inter-firm alliances and contributes to the integration of insights from the ABV and alliance research traditions to build a more comprehensive understanding of alliance success factors.

Ownership dispersion across large shareholders and loan-syndicate structure

This study tests the relationship between ownership dispersion across large shareholders and the structure of loan syndicates. The results of an analysis of a set of bank loan contracts that were extended to Indonesian listed firms, from 1992 to 2016, show that an uneven ownership distribution between the largest controlling shareholder and multiple large shareholders is associated with a smaller and more concentrated syndicate. In line with the agency and moral hazard theoretical framework, the results suggest that in a weak legal system, when banks are lending to companies that are at a high risk of expropriation, they decrease the syndicate size and increase the syndicate concentration in order to intensify their efforts in due diligence and monitoring.

Post‐financial crisis changes in financial system structure: An examination of the J.P. Morgan & Co. Syndicates after the 1907 Panic

AbstractIn the post‐2008 crisis period, policy makers debate the implications of banking system concentration. To shed light on this debate, we study a postcrisis period in which less banking regulation existed than in the present period, reasoning that an examination of a less regulated market might reveal useful insights about present day market agents' postcrisis actions. The years immediately following the Panic of 1907 merit study because the period shares important features with the post‐2008 crisis financial system: increasing interconnectedness, the growing complexity accompanying the rise of new industries, the rapid deployment of new communications technologies, and substantial innovation in financial instruments. Because the 1907 crisis preceded the Clayton Anti‐Trust Act of 1914, it also provides a window into studying market agents' behavior before legislation was enacted to discourage banking system concentration. We find evidence that the market share of corporate bond underwritings at J.P. Morgan & Co. increased in the post‐1907 crisis period. We suggest a mechanism by which market share increased: a more concentrated configuration of corporate bond underwriting syndicates. We also indicate that Morgan's increased share may have been a proxy for increased certification value of underwriter reputation because of systemic knowledge Morgan gained during the resolution of the Panic of 1907 rather than for increasing bargaining power. We do not find evidence that Morgan used market power to extract rents from issuers despite increased market share and more concentrated syndicate organization. While our results must be interpreted cautiously due to data limitations, possible lessons for present‐day policy makers are that consolidations in the financial system after a financial crisis are complex. Some consolidations may come about from information and reputational gains produced during the crisis. Others may be moves by some firms to concentrate market power and still others from efforts to improve efficiencies in intermediation.

Information Asymmetry and the Structure of Loan Syndicates

This study explores the impact of information asymmetry between lenders and borrowers on loan syndicate structure. Using a sample of 17,839 loans raised by 8,701 US firms between January 1986 and August 2007, we confirm existing evidence that lead arrangers form concentrated syndicates when borrowers require intense monitoring and due diligence. We provide new evidence regarding the roles of borrower reputation, lead arranger reputation and the bank-borrower relationship. First, lead arranger reputation can reduce information asymmetry but only for the most reputable lead arrangers. Second, borrower reputation, measured by the borrower’s past access of the loan market, reduces the problem of information asymmetry, with higher reductions for more recent and more regular borrowers. Third, our results regarding the past relationship between the borrower and the lead arranger support the moral hazard aspect of information asymmetry for all borrowers. We also find evidence for the adverse selection aspect of information asymmetry but only for opaque borrowers. The effect can, however, be overcome by the most reputable lead arrangers, as their behavior is strongly influenced by a fear of loss of reputation

Loan Syndication Structures and Price Collusion

How does the organizational form of loan syndicates evolve and what are the effects on price collusion? We develop a novel measure of distance in lending expertise among syndicate lenders, and relate this novel measure to the organizational form of loan syndicates and loan pricing. Studying the U.S. syndicated loan market from 1989 to 2017, we find that the organizational form of loan syndicates significantly varies across our lender measure based on similar specializations in lending which we call syndicated distance. Large lead arrangers prefer to form close and concentrated syndicates by letting lenders with similar lending expertise into their syndicates and allocating those lenders higher loan shares. Analyzing loan pricing, we find that concentrated syndicates possess improved screening abilities, but collude on loan pricing. Consistent with Hatfield et al. (2017), we find however that price collusion of concentrated syndicates only occurs during periods of low market concentration. Our findings imply that both the organizational form of loan syndicates and the level of market concentration affect price collusion.

Relationship Banking and Loan Syndicate Structure: The Role of Private Equity Sponsors

AbstractUsing a sample of syndicated loans to private equity (PE)‐backed initial public offering companies, we examine how a third‐party bank relationship influences the syndicate structure of a loan. We find that a stronger relationship between the lead bank and the borrower's PE firm enables the lead bank to retain a smaller share of the loan and form a larger and less concentrated syndicate, especially when the borrower is less transparent. A stronger PE‐bank relationship also attracts greater foreign bank participation. Our findings suggest that the lead bank's relationship with a large equity holder of the borrower facilitates information production in lending.

Organized Labor and Debt Contracting: Firm-Level Evidence from Collective Bargaining

ABSTRACT This paper employs a firm-level collective bargaining dataset to investigate the effect of labor, as an important stakeholder of a firm, on debt contracting. I conjecture and provide evidence that firms with strong organized labor prefer bank loans to public bonds because, by communicating with banks privately, unionized firms can reduce the adverse selection costs while preserving the information asymmetry with organized labor. Furthermore, I show that organized labor influences the structure of syndicated loans. When firms with strong unions withhold public disclosures, but communicate privately with lead lenders, heightened information asymmetry between the lead lenders and the participant lenders induces the lead lenders to retain larger shares of the loans and form more concentrated syndicates. Overall, this study demonstrates that the proprietary costs of disclosure related to organized labor significantly influence firms' debt contracting decisions and outcomes. Data Availability: Data are available from sources identified in the text.

Relationship Banking and Loan Syndicate Structure: The Role of Private Equity Sponsors

Using a sample of syndicated loans to U.S. IPO companies, we examine how the relationship between the PE sponsor of a borrower’s IPO and the lead bank of the loan influences loan syndicate structure. We find that a stronger PE-bank relationship enables the lead bank to retain a smaller share of the loan and form a larger and less concentrated syndicate, especially when the borrower is less transparent. A stronger PE-bank relationship also attracts greater foreign bank participation. Our findings suggest that the lead bank’s relationship with a third-party financial sponsor of the borrower facilitates information production in lending.

Analyst coverage, syndicate structure, and loan contracts

This paper examines the effect of information intermediaries, specifically financial analysts, on the non-price terms and syndicate structure of bank loans. We find that loans to firms with higher analyst coverage have significantly less intensive covenant restrictions, a lower likelihood of requiring collateral and a lower likelihood of having performance-pricing provisions. Furthermore, our results document a negative relation between analyst coverage and loan maturity, implying that banks become more information-sensitive when lending to firms with large analyst coverage. We also find evidence that lenders tend to form less concentrated syndicate when the number of analysts increases.

Does the Reputation of a Private Equity Group Break the Bank-Dependence of its Portfolio Company?

We investigate the impact of the reputation of a private equity group (PEG) on financing costs in leveraged buyouts (LBOs). PEGs with a strong reputation have superior selection abilities and may be able to obtain cheaper LBO loans due to their role in limiting moral hazard or their impact on lenders’ bargaining power in loan contract negotiations. We examine a sample of 4,111 credit facilities within 1,524 PEG-sponsored LBO loans in North America and Europe between 1993 and 2009. After controlling for other borrowers’ characteristics, the financing contract, and other factors, we find that PEGs’ reputation indeed lowers financing costs. The size of the effect depends crucially on the chosen syndicate structure. The effect on credit spreads is much stronger when the loan syndicate is highly concentrated. The literature reveals that concentrated syndicate structures are chosen by less transparent and more bank-dependent borrowers. We therefore conclude that well-reputed PEGs reduce financing costs because they are able to alleviate the effects of information monopolies that arise when asymmetric information limits the degree of competition between financing banks.

Information Asymmetry and Financing Arrangements: Evidence from Syndicated Loans

ABSTRACTI empirically explore the syndicated loan market, with an emphasis on how information asymmetry between lenders and borrowers influences syndicate structure and on which lenders become syndicate members. Consistent with moral hazard in monitoring, the lead bank retains a larger share of the loan and forms a more concentrated syndicate when the borrower requires more intense monitoring and due diligence. When information asymmetry between the borrower and lenders is potentially severe, participant lenders are closer to the borrower, both geographically and in terms of previous lending relationships. Lead bank and borrower reputation mitigates, but does not eliminate information asymmetry problems.

Information Asymmetry and Financing Arrangements: Evidence from Syndicated Loans

I empirically explore the syndicated loan market, with an emphasis on how information asymmetry between lenders and borrowers influences syndicate structure and on which lenders become syndicate members. Consistent with moral hazard in monitoring, the lead bank retains a larger share of the loan and forms a more concentrated syndicate when the borrower requires more intense monitoring and due diligence. When information asymmetry between the borrower and lenders is potentially severe, participant lenders are closer to the borrower, both geographically and in terms of previous lending relationships. Lead bank and borrower reputation mitigates, but does not eliminate, information asymmetry problems.

Creditor Rights, Enforcement, and Debt Ownership Structure: Evidence from the Global Syndicated Loan Market

Using a sample of 495 project finance loan tranches (worth $151 billion) to borrowers in 61 different countries, we examine the relation between legal risk and debt ownership structure. The tranches exhibit high absolute levels of debt ownership concentration: the largest single bank holds 20.3% while the top five banks collectively hold 61.2% of a typical tranche. In countries with strong creditor rights and reliable legal enforcement, lenders create smaller and more concentrated syndicates to facilitate monitoring and low cost contracting. When lenders cannot rely on legal enforcement mechanisms to protect their claims, they create larger and more diffuse syndicates as a way to deter strategic default.

The Size and Composition of Commercial Lending Syndicates

We examine the factors that influence the structure (size and composition)of a commercial lending syndicate. We find that syndicates are smaller and more concentrated, as reflected in the Hirschman Herfindahl index for the lending group, when there is less information available about the borrower, when credit risk is relatively high, and when a loan is secured. Syndicates are larger and more diffuse when the arranging bank is more reputable, when the arranger constrains the loan re-sale activity of group members, when the loan has a long term to maturity, and when the borrower holds large growth options. Our results are robust when we restrict the sample to borrowers with equity that trades and to borrowers with a credit rating. The findings for the proportional holdings of syndicate members likewise are robust when we control for the influence of syndicate size on composition. Arrangers create more concentrated syndicates when the expected size of the lending group increases.