Contracting in the Dark: The Rise of Public-Side Lenders in the Syndicated Loan Market

Accounting and Management Control

Speaker: Regina Wittenberg (Marshall University of Southern California)

Room T004

Abstract:

We document a novel trend in syndicated lending where some participants voluntarily waive their rights to access borrowers’ private information. The primary cost for these public-side lenders is that they are unable to use private information to evaluate borrowers’ creditworthiness. In line with this cost, we find that public-side lenders are more likely to participate in loans syndicated by reputable lead arrangers and those that include more restrictive monitoring provisions, which mitigate these lenders’ information disadvantage. The significant benefit of forgoing access to private information is the ability to avoid regulatory scrutiny associated with the potential leakage of borrowers’ private information into public securities markets. Accordingly, we find that the participation of public-side lenders is more likely when there is greater regulatory oversight of the potential misuse of private information. We further show that institutions that are less likely to have robust internal information barriers (i.e., institutional investors and small and foreign banks) are more likely to join syndicates as public-side lenders. Finally, we find that public-side lenders are positively associated with larger lending syndicates, less leakage of private information into public equity markets, and a greater likelihood and timeliness of ex-post renegotiations, consistent with important benefits to both lead arrangers and borrowers.