Bank reputation in the private debt market

Abstract

We examine the impact of lead arrangers' reputation on the design of loan contracts such as spread and fees charged. Controlling for the non-randomness of the lender-borrower match (self-selection bias), we find that the reputation of top tier arrangers leads to higher spreads, and that top tier arrangers retain larger fractions of their loans in their syndicates. These larger spreads are especially pronounced for borrowers without credit rating that have the most to gain from the certification assumed by virtue of a loan contract with a top tier arranger. This certification channel differs from the one found in public markets, where certification leads to a reduced spread offered to the best clients. These differences between public and private markets can be explained by differences in the way they operate and are structured. Interestingly, the effect is strongest for transactions done after the changes in the banking regulations (including the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994) that led to significant consolidations in the banking industry, including among the largest commercial banks.

Underwriter Reputation and the Quality of Certification: Evidence from High-Yield Bonds

“…Our findings, in providing primary evidence from the bond market in favor of the market-power over the certification hypothesis, support recent results by Chemmanur and Krishnan (2012) and McCahery and Schwienbacher (2010). The former find reputable underwriters to be associated with equity IPOs priced further from intrinsic values, the latter, reputable lead arrangers in the SCHUMPETER DISCUSSION PAPERS 2013-006 loan market to be associated with higher loan spreads.…”

“…We control for high-yield bond market sentiment using the variable HY index. We thus use in the first-stage regression a number of variables that differ significantly for reputable 20 This approach is used in such other recent studies as Fernando et al (2012), Golubov et al (2012), andMcCahery andSchwienbacher (2010). Fang (2005) is the only study on certification in security markets (to the best of our knowledge) that uses a switching regression model, i.e.…”

“…The most reputable underwriters thus increase rather than reduce issuers' informational costs and, hence, do not seem to fulfill a certification function. Following Puri (1996), Fang (2005), and McCahery and Schwienbacher (2010), we use the inverse Mills ratio for the choice of a Top 3 lead underwriter in the second-stage regressions (Heckman 1979) to measure the pricing effect of underwriter evaluation standards (i.e., ability to certify issuer quality). Our results suggest that investors generally should, and do, not believe that at-stake reputation capital incentivizes the most reputable underwriters to report client quality honestly.…”

Bank Lending Networks, Experience, Reputation, and Borrowing Costs: Empirical Evidence from the French Syndicated Lending Market

“…Similar results are obtained by Cai et al (2010) for syndicates composed of arrangers which are closer in terms of lending expertise. On the other hand, McCahery and Schwienbacher (2010) find that loans arranged by reputable banks lead to higher loan spreads, especially for opaque borrowers who pay a 'reputation premium'.…”

Market response to syndicated loan announcements from high‐profile failed and acquiring banks during the global financial crisis

“…14 Syndicated loans have multiple lenders and possibly mitigate the loss of relationship lending. McCahery and Schwienbacher (2010) and Ross (2010) examine the 'reputation effect' associated with lending banks. Both studies indicate that bank reputations are based on superior evaluation of the borrowing companies and assessing the 'true risk' of default at the time of the initial screening as well as subsequent monitoring.…”