Within-syndicate conflicts,loan covenants,and syndicate formation

We study how conflicts within a lending syndicate affect loan contract and syndicate formation. We argue that loan provisions serve an important dual function: In addition to moderating borrower–lender conflicts, they reduce within-syndicate conflicts. We show that greater potential for within-syndicate conflicts is associated with more and stricter covenants. Loans are less restrictive when the interests of participants and the lead arrangers are better aligned, for example, when participant–banks have stronger relationships with the lead arranger or hold borrower's equity (indirectly). Overall, our results show that covenant choice, syndicate formation, and lead arranger's loan allocation all play an important role in reducing within-syndicate conflicts.     

Institutional influence on syndicate structure and cross‐border leveraged buyouts

We explore the extent to which differences in countries’ formal and informal institutions reduce cross‐border leveraged buyout transactions and the potential influence these same institutions have on how private equity (PE) investors choose to enter these transactions. Although institutional differences have frequently been viewed as barriers to cross‐border investment, we find evidence that these same differences may motivate a PE firm's decision to enter the transaction with a syndicate of firms rather than undertaking the transaction on their own. Cultural differences between a PE firm and the target nation are significantly related to the choice to enter the deal via a multinational syndicate. The varying nationalities within the syndicate contribute to enhanced familiarity, with average institutional distances between the syndicate and target firms being significantly lower than for single‐PE‐led deals. Overall, deals undertaken by syndicates are more likely to be successfully completed and require less time in negotiation. These results persist even after accounting for selection bias with regard to target country choice. We explore whether other features of the syndicate are responsible for improved deal outcomes, such as repeated transactions with the same partners, but find no evidence that this is the case.     

Political risk,project finance,and the participation of development banks in syndicated lending

How should loan contracts for financing projects in countries with high political risk be designed? We argue that non-recourse project finance loans and the participation of development banks in the loan syndicate help mitigate political risk. We test these arguments by conducting a study with a sample of 4978 loans made to borrowers in 64 countries. Our results show that if political risk is higher, then project finance loans are more likely to be used, and development banks are more likely to participate in the syndicate. We also show that the terms of the loan contract depend not only on the political risk but also on the legal and institutional environment as well.     

The syndicate structure of securitized corporate loans

Securitized loans have lower lead bank shares, but larger shares held by non-CLO (collateralized loan obligation) institutional investors than nonsecuritized loans. The result can largely be explained by their degree of information asymmetry and credit risk. We find that lead banks increase their holdings after a nonsecuritized loan becomes securitized, but they do not reduce financial exposure to securitized facilities during the boom of the CLO market. Furthermore, we find that securitized loans do not perform differently from similar nonsecuritized loans. We conclude that differences in syndicate structure are likely shaped by participants’ investment preference rather than a manifestation of adverse selection.     

Dynamic equilibrium and the structure of premiums in a reinsurance market

In this paper we present an economic equilibrium analysis of a reinsurance market. The continuous-time model contains the principal components of uncertainty; about the time instants at which accidents take place, and about claim sizes given that accidents have occurred. We give sufficient conditions on preferences for a general equilibrium to exist, with a Pareto optimal allocation, and derive the premium functional via a representative agent pricing theory. The marginal utility process of the reinsurance market is represented by the density process for random measures, which opens up for numerous applications to premium calculations, some of which are presented in the last section. The Hamilton-Jacobi-Bellman equations of individual dynamic optimization are established for proportional treaties, and the term structure of interest rates is found in this reinsurance syndicate. The paper attempts to reach a synthesis between the classical actuarial risk theory of insurance, in which virtually no economic reasoning takes place but where the net reserve is represented by a stochastic process, and the theory of equilibrium price formation at the heart of the economics of uncertainty.     

Syndicate Size,Spreads, and Market Power during the Introduction of Shelf Registration

The introduction of shelf registration in 1982 is used to examine the extent of price-taking behavior among investment banks. Changes in underwriting syndicates are compared with the concomitant adjustment in underwriting spreads and management fees. The evidence is consistent with higher organizing costs and/or market power in the underwriting syndicate. Evidence on the components of the spreads and syndicate composition during the introduction of shelf registration is also presented.     

Are Analysts’ Recommendations for Other Investment Banks Biased?

This paper provides evidence of a “Potential conflict of interest by equity analysts” who issue recommendations for investment banks that are related to their own bank through syndication. Analysts issue significantly more optimistic recommendations for investment banks with which their bank is syndicated. Recommending banks upgrade their recommendations just before a relation is initiated, suggesting that they use analyst optimism as a means of currying favor with the syndicate lead in hopes of being invited to join. It also appears that as part of a quid pro quo of sorts, relatively optimistic recommendations are rewarded with more syndicate appointments in the year after the recommendations.     

The Informational Role of the Media in Private Lending

We investigate whether a borrower's media coverage influences the syndicated loan origination and participation decisions of informationally disadvantaged lenders, loan syndicate structures, and interest spreads. In syndicated loan deals, information asymmetries can exist between lenders that have a relationship with a borrower and less informed, nonrelationship lenders competing to serve as lead arranger on a syndicated loan, and also between lead arrangers and less informed syndicate participants. Theory suggests that the aggressiveness with which less informed lenders compete for a loan deal increases in the sentiment of public information signals about a borrower. We extend this theory to syndicated loans and hypothesize that the likelihood of less informed lenders serving as the lead arranger or joining a loan syndicate is increasing in the sentiment of media‐initiated, borrower‐specific articles published prior to loan origination. We find that as media sentiment increases (1) outside, nonrelationship lenders have a higher probability of originating loans; (2) syndicate participants are less likely to have a previous relationship with the borrower or lead bank; (3) lead banks retain a lower percentage of loans; and (4) loan spreads decrease.     

Asymmetric information effects on loan spreads

This paper estimates the cost arising from information asymmetry between the lead bank and members of the lending syndicate. In a lending syndicate, the lead bank retains only a fraction of the loan but acts as the intermediary between the borrower and the syndicate participants. Theory predicts that asymmetric information will cause participants to demand a higher interest rate and that a large loan ownership by the lead bank should reduce this effect. In equilibrium, however, the asymmetric information premium demanded by participants is offset by the diversification premium demanded by the lead. Using shifts in the idiosyncratic credit risk of the lead bank's loan portfolio as an instrument, I measure the asymmetric information effect of the lead's share on the loan spread and find that it accounts for approximately 4% of the total cost of credit.     

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.     

Option implied volatilities and the cost of issuing equity

The structure of a firm-commitment Seasoned Equity Offering (SEO) resembles a put-option underwritten by an investment bank syndicate (Smith, 1977). Employing implied volatilities from issuers’ stock options as a direct forward-looking measure, this paper examines the impact of expected price risk around SEO issue dates on the direct cost of issuing equity. Using a comprehensive sample of 1208 SEOs between 1996 and 2009, we find issuers with higher option implied volatilities raise less external equity capital and pay higher investment bank fees in the stock market, ceteris paribus. The effect of implied volatility on the investment bank fees is stronger for larger issuers with lower pre-SEO abnormal realized stock volatilities, and for SEOs with higher expected price pressures around issue dates. These relationships are robust to adjustments for correlations among control variables, sample selection bias and also simultaneous determination of offer size and SEO fees.     

A Comparison of Syndicated Loan Pricing at Investment and Commercial Banks

We reject the hypothesis that investment and commercial banks have identical loan-pricing policies. We find that compared to commercial banks, investment banks lend to less profitable, more lever aged firms, price riskier classes of term loans more generously, and offer relatively longer-term credits, usually with term, not commitment contracts. Investment banks typically establish higher credit spreads, although the premium declines when a commercial bank joins as syndicate co-arranger. Investment banks also price riskier classes of term loans more generously to borrowers than do commercial banks. Commercial-bank funding advantages do not appear to be a source of the pricing differences.     

Market response to syndicated loan announcements from high-profile failed and acquiring banks during the global financial crisis

Previous studies that have examined the impact of the 2008 financial crisis on syndicated loans have ignored potential differences between lending banks by explicitly or implicitly aggregating all lenders together and focusing on borrower characteristics. One must jointly consider both borrower and lender to fully understand the complex role of the syndicate during this period. We consider the identity of the lender, with a focus on five major US banks that failed and their five corresponding acquirers. Our results highlight the distinct roles of investment and commercial banks and facilitate an understanding of relationship and transactional-based lending.     

CEO Risk‐taking Incentives and Bank Loan Syndicate Structure

This paper investigates the effects of a borrowing firm's CEO risk‐taking incentives on the structure of the firm's syndicated loans. When CEO risk‐taking incentives are high, syndicates are structured to facilitate better due diligence and monitoring efforts. These syndicates have a smaller number of total lenders and are more concentrated, and lead arrangers will retain a greater portion of the loan. Moreover, CEO risk‐taking incentives have a lesser effect on the syndicate structure when lead arrangers have a good reputation and a prior lending relationship with a borrowing firm, while they have a greater effect on the syndicate structure when borrowing firms have low information transparency, are financially distressed or have low growth prospects.     

Time-varying risk attitude and the foreign exchange market behavior

This paper presents a heterogeneous agents model of the foreign exchange market in which agents’ risk attitudes vary over time due to psychological factors emphasized in prospect theory. We find that psychological component and risk-profit elasticity play significant roles in exchange rate expectations formation and investment behavior. Although all agents show more risk-averse after the crisis, the extent to which their risk attitude responds to the crisis varies due to heterogeneous forecasting rules as well as the changes of trading environment and central bank intervention. Moreover, time-varying risk attitudes can help explain the forward premium puzzle. These findings have implications for the exchange rate expectation formation theories and foreign exchange market stability policies.     

The Role of IPO Underwriting Syndicates: Pricing, Information Production, and Underwriter Competition

We examine syndicates for 1,638 IPOs from January 1997 through June 2002. We find strong evidence of information production by syndicate members. Offer prices are more likely to be revised in response to information when the syndicate has more underwriters and especially more co‐managers. More co‐managers also result in more analyst coverage and additional market makers following the IPO. Relationships between underwriters are critical in determining the composition of syndicates, perhaps because they mitigate free‐riding and moral hazard problems. While there appear to be benefits to larger syndicates, we discuss several factors that may limit syndicate size.     

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Abstract

In this paper a continuous-time model of a reinsurance market is presented, which contains the principal components of uncertainty transparent in such a market: Uncertainty about the time instants at which accidents take place, and uncertainty about claim sizes given that accidents have occurred.

Due to random jumps at random time points of the underlying claims processes, the absence of arbitrage opportunities is not sufficient to give unique premium functionals in general. Market preferences are derived under a necessary condition for a general exchange equilibrium. Information constraints are found under which premiums of risks are determined. It is demonstrated how general reinsurance treaties can be uniquely split into proportional contracts and nonproportional ones.

Several applications to reinsurance markets are given, and the results are compared to the corresponding theory of the classical one-period model of a reinsurance syndicate.

This paper attempts to reach a synthesis between the classical actuarial risk theory of insurance, in which virtually no economic reasoning takes place but where the net reserve is represented by a stochastic process, and the theory of partial equilibrium price formation at the heart of the economics of uncertainty.     

Liquidity risk and syndicate structure

We decompose syndicated loan risk into credit, market, and liquidity risk and test how these shape syndicate structure. Commercial banks dominate relative to non-banks in loan syndicates that expose lenders to liquidity risk. This dominance is most pronounced when borrowers have high levels of credit or market risk. We then tie commercial banks’ advantage in liquidity risk to access to transactions deposits by comparing investments across banks. The results suggest that risk-management considerations matter most for participants relative to lead arrangers. Links from transactions deposits to liquidity exposure, for instance, are more than 50% larger at participants than at lead arrangers.     

Investment timing and optimal capital structure under liquidity risk

Deterioration in debt market liquidity reduces debt values and affects firms' decisions. Considering such risk, we develop an investment timing model and obtain analytic solutions. We carry out a comprehensive analysis in optimal financing, default, and investment strategies, and stockholder–bondholder conflicts. Our model explains stylized facts and replicates empirical findings in credit spreads. We obtain six new insights for decision makers. We propose a ‘new trade-off theory’ for optimal capital structure, a new tax effect, and new explanations of ‘debt conservatism puzzle’ and ‘zero-leverage puzzle’. Failure in recognizing liquidity risk results in substantially over-leveraging, early bankruptcy or investment, overpriced options, and undervalued coupons and credit spreads. In addition, agency costs are surprisingly small for a high liquidity risk or a low project risk. Interestingly, the risk shifting incentive and debt overhang problem decrease with liquidity risk under moderate tax rates while they increase under high tax rates.     

Sunk costs and sunk benefits: A re-examination of re-investment decisions

Prior experimental studies supporting the prospect theory explanation of the sunk-cost effect manipulate the framing of the initial investment, describing it either in neutral terms or as a prior loss. This paper subjects the prospect theory explanation to further examination, but takes an alternative experimental approach based on the differential risk taking behaviour predicted by prospect theory’s S-shaped value function. The experiments manipulate whether an initial investment produces a sunk cost (prior loss) or a sunk benefit (prior gain) and investigate the impact of this on the likelihood of authorising an incremental investment held constant across treatment conditions. To ensure the results are robust to the type of incremental investment, two experiments are conducted across which the outcomes of the incremental investment are manipulated to produce poor or good investment opportunities. In all cases the results fail to support a higher likelihood of authorising the incremental investment following a sunk cost than a sunk benefit. In isolation, therefore, prospect theory is unable to explain fully the sunk-cost effect.