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Leaders of loan syndicates often delegate some administrative tasks to banks known as co-agents. One reason is that co-agents are specialized banks that help split the costs of managing the syndicate. Another reason is that co-agents monitor the leader on behalf of syndicate members to mitigate informational asymmetry problems. Large sample tests on the Dealscan database provide support for both arguments. Evidence of repeated contracting between the same banks explains the moderate magnitude of monitoring effects. Copyright 2007, The Eastern Finance Association.

We thank the editors Craig Lewis and Chris Veld, and an anonymous referee, as well as Tolga Cenesizoglu, Jean-Sébastien Michel, and participants at the 2013 IFM2 Mathematical Finance Days for helpful comments. François Leclerc, Manping Li and Siyang Wu provided valuable research assistance.

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We would like to thank Jan Ericsson, Jean Helwege and Franck Moraux for their useful comments. We also thank Ali Boudhina for excellent research assistance. Annabi and Breton acknowledge financial support from IFM 2 and NSERC. François acknowledges financial support from SSHRC.

Using an innovative random regime shift detection methodology, we identify and confirm two distinct regime types in the dynamics of credit spreads: a level regime and a volatility regime. The level regime is long lived and shown to be linked to Federal Reserve policy and credit market conditions, whereas the volatility regime is short lived and, apart from recessionary periods, detected during major financial crises. Our methodology provides an independent way of supporting structural equilibrium models and points toward monetary and credit supply effects to account for the persistence of credit spreads and their predictive power over the business cycle.

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