The Monitoring Incentive of Transactional and Relationship Lenders: Evidence from the Syndicated Loan Market

We identify a group of lenders specializing in syndicating tradable loans (referred to as transactional lenders [TLs]). We show that borrowers borrowing from TLs experience worse operating performance and more severe credit quality deterioration after loan origination compared to those borrowing from relationship lenders. This difference in the postloan issue performance remains robust after controlling for the potential self‐selection of the lender type, or using percentage of traded loans out of all syndicated loans to capture lenders’ propensity for syndicating tradable loans. Our results also remains qualitatively the same after we drop various types of risky loans.     

State ownership and banks’ information rents: Evidence from China

In a lending relationship, a bank with an information advantage regarding its client tends to hold up the borrower and charge higher interest rates. We conjecture that state-owned enterprises (SOEs), with worse information asymmetry, are subject to greater information rents. State-owned banks place less emphasis on information production and hence extract lower rents compared to profit-maximizing private banks. We use the decline of loan interest rates around the borrowers’ equity initial public offerings (IPOs) as the proxy of banks’ information rents. We find SOEs in China experience larger declines in loan interest rates around their IPOs; the central government-controlled Big Four banks exhibit smaller declines in rates they charge, and their rate declines concentrate on loans made to SOEs.     

Does Securitization of Corporate Loans Lead to Riskier Lending?

This paper finds that loans sold to collateralized loan obligations (CLOs) underperform matched unsecuritized loans originated by the same bank. We find that banks put less weight on the hard information on borrower risk available to them when they set interest rates on the loans they sell to CLOs, and that they retain less skin in the game on these loans, suggesting that lax underwriting standards contributed to the worse performance of securitized loans. We also find that the median non‐CLO syndicate participant retains a lower stake in securitized loans when compared to loans that are not securitized, suggesting that these investors, like lead banks, expected securitized loans to perform worse.     

Determinants of the Loan Loss Allowance: Some Cross‐Country Comparisons

This paper analyzes the determinants of banks' loan loss allowance for samples of U.S. banks and three non‐U.S. samples: a group of 21 countries, Canada, and Japan. The model includes fundamental (or nondiscretionary) determinants of the allowance, such as nonperforming loans, and discretionary determinants, such as income before the loan loss provision. The results suggest that the loan loss allowance is sensitive to preprovision income in almost all samples. However, the results also suggest that some variables thought to reflect fundamental factors in U.S. analysis, such as net charge‐offs, are not significant factors for non‐U.S. banks.     

Voluntary Disclosure with Informed Trading in the IPO Market

We examine voluntary disclosure and capital investment by an informed manager in an initial public offering (IPO) in the presence of informed and uninformed investors. We find that in equilibrium, disclosure is more forthcoming—and investment efficiency is lower—when a greater fraction of the investment community is already informed. Moreover, managers disclose more information when the likelihood of an information event is higher, more equity is issued, or the cost of information acquisition is lower. Investment efficiency and the expected level of underpricing are non‐monotonic in the likelihood that the manager is privately informed.     

The Risk‐Taking Channel of Monetary Policy in the U.S.: Evidence from Corporate Loan Data

To study the presence of a risk‐taking channel in the U.S., we build a comprehensive data set from the syndicated corporate loan market and measure monetary policy using different measures, most notably Taylor (1993) and Romer and Romer (2004) residuals. We identify a negative relation between monetary policy rates and bank risk‐taking, especially in the run up to the 2007 financial crisis. However, this effect is purely supply‐side driven only when using Taylor residuals and an ex ante measure of bank risk‐taking. Our results highlight the sensitivity of the potency of the risk‐taking channel to the measures of monetary policy innovations.     

The Role of Soft Information in a Dynamic Contract Setting: Evidence from the Home Equity Credit Market

Credit underwriting is a dynamic process involving multiple interactions between borrower and lender. During this process, lenders have the opportunity to obtain hard and soft information from the borrower. We analyze more than 108,000 home equity loans and lines‐of‐credit applications to study the role of soft and hard information during underwriting. Our data set allows us to distinguish lender actions that are based strictly on hard information from decisions that involve the collection of soft information. Our analysis confirms the importance of soft information and suggests that its use can be effective in reducing overall portfolio credit losses ex post.     

Corporate Loan Securitization and the Standardization of Financial Covenants

We examine whether syndicated loans securitized through collateralized loan obligations (CLOs) have more standardized financial covenants. We proxy for the standardization of covenants using the textual similarity of their contractual definitions. We find that securitized loans are associated with higher covenant standardization than nonsecuritized institutional loans. In addition, we show that CLOs with more diverse or frequently rebalanced portfolios are more likely to purchase loans with standardized covenants, potentially because standardization alleviates information processing costs related to loan monitoring and screening. We also document that covenant standardization is associated with greater loan and CLO note rating agreement between credit rating agencies, further supporting the relation between lower information costs and covenant standardization. Overall, our study provides evidence that loan securitization is related to the design of standardized financial covenants.