The Effect of Banks’ Financial Reporting on Syndicated Loan Structures

• In Event: Accounting and Debt Contract

Abstract

The delegation of loan screening and monitoring to lead lenders by loan syndication participants creates information asymmetry and associated agency problems between the lead lenders and participants. These information problems can be mitigated by lead lenders holding a greater share of the loan. Alternatively, the lead lenders financial reporting may be used to reduce these problems. We examine whether lead lenders’ loan loss provision validity affects lead lenders’ loan shares. We first validate the relation between provision validity and banks’ screening and monitoring abilities using both ex post monitoring outcomes and cross-sectional variation in equity market reactions to loan announcements made by borrowers. We then hypothesize and find that, when lead lenders’ loan loss provisions better capture subsequent charge offs (i.e., higher provision validity), lead lenders retain lower fractions of syndicated loans. To isolate the information effect, we examine how this relation differs based on lender and borrower relationships. Our finding that the importance of lead lenders’ provision validity on syndication structures is attenuated by lead lenders’ previous syndicating relationships with participating banks, participants’ previous lending relationships with the borrower, and lead lenders’ past lending relationships with the borrower suggests that our measure is capturing an information effect and not merely capturing the lead lenders’ screening and monitoring abilities. Our study contributes to the literature by exploring how lead lenders’ accounting information affects information asymmetry between lead lenders and participating banks and thereby influences syndication structures.

Authors

• Anne Beatty, The Ohio State University

• Scott Liao, University of Toronto

• Haiwen Zhang, The Ohio State University