Matthew M. Koepke

We formulate and test two opposing hypotheses about how lead banks in the syndicated loan market use private information about loan quality, the Signaling Hypothesis and Sophisticated Syndicate Hypothesis. We use Shared National Credit (SNC) internal loan ratings made comparable using concordance tables to measure private information. We find favorable private information is associated with higher lead bank loan retention and lower interest rate spreads for pure term loans, ceteris paribus, supporting the Signaling Hypothesis. Neither hypothesis dominates for pure revolvers. The data partially support two conjectures about the circumstances under which the two hypotheses are more likely to hold.

Little is known about how lead banks in the syndicated loan market use their private information about loan quality. We formulate and test two opposing hypotheses, the Signaling Hypothesis and the Sophisticated Syndicate Hypothesis. To measure private information, we use Shared National Credit (SNC) internal loan ratings, which are made comparable across lead banks using concordance tables. We find that favorable private information is associated with higher loan retention by lead banks for term loans, ceteris paribus, consistent with the Signaling Hypothesis, while neither hypothesis dominates for revolvers. Differences in syndicate structure at least partially explain this disparity.

We formulate and test two hypotheses, the Signaling Hypothesis and Sophisticated Syndicate Hypothesis, to investigate how lead banks in the syndicated loan market use their private information about loan quality.

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