How Do Lead Banks Use Their Private Information about Loan Quality in the Syndicated Loan Market?

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.