Contact Info

t. 216.206.3665

f. 216.579.3050

jian.cai@clev.frb.org

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Jian Cai |

Research Economist

Jian Cai, Research Economist

Jian Cai is a research economist in the Research Department of the Federal Reserve Bank of Cleveland. She is primarily interested in theoretical and empirical corporate finance and financial intermediation, and empirical asset pricing. Her current work focuses on interbank competition, executive compensation, and agency problems.

Dr. Cai earned a PhD in finance and an MBA from Washington University in St. Louis. She also holds a bachelor’s degree in economics from Fudan University (Shanghai, China) and a master’s degree in marketing research from Southern Illinois University at Edwardsville. Prior to her PhD study, she worked for Fleishman-Hillard as a senior research manager and for Commerce Bancshares as a senior business intelligence analyst and a bank officer.

  • Fed Publications
Title Date Publication Author(s) Type
Competition or Collaboration? The Reciprocity Effect in Loan Syndication

 

 October, 2009 Federal Reserve Bank of Cleveland, working paper no. 09-09 Jian Cai; Working Papers
Abstract: It is well recognized that loan syndication generates a moral hazard problem by diluting the lead arranger’s incentive to monitor the borrower. This paper proposes and tests a novel view that reciprocal arrangements among lead arrangers serve as an effective mechanism to mitigate this agency problem. Lender arrangements in about seven out of ten syndicated loans are reciprocal in the sense that lead arrangers also participate in loans that are led by their participant lenders. I develop a model in which syndicate lenders share reciprocity through such arrangements in a repeated-game setting as monitoring effort enhances lead arrangers’ ability to profit from participating in loans led by others. The model generates specific predictions that I then confront with the data. I find strong and consistent empirical evidence on the reciprocity effect. Controlling for lender, borrower, and loan characteristics, I show that: (i) lead arrangers retain on average 4.3% less of the loans with reciprocity than those without reciprocity, (ii) the average interest spread over LIBOR on drawn funds is 11 basis points lower on loans with reciprocity, and (iii) the default probability is 4.7% lower among loans with reciprocity. These results indicate a cooperative equilibrium in loan syndication and have important implications to lending institutions, borrowing firms, and regulators.
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