CEO Risk‐taking Incentives and Bank Loan Syndicate Structure

Abstract

This paper investigates the effects of a borrowing firm's CEO risk‐taking incentives on the structure of the firm's syndicated loans. When CEO risk‐taking incentives are high, syndicates are structured to facilitate better due diligence and monitoring efforts. These syndicates have a smaller number of total lenders and are more concentrated, and lead arrangers will retain a greater portion of the loan. Moreover, CEO risk‐taking incentives have a lesser effect on the syndicate structure when lead arrangers have a good reputation and a prior lending relationship with a borrowing firm, while they have a greater effect on the syndicate structure when borrowing firms have low information transparency, are financially distressed or have low growth prospects.

CEO inside debt and bank loan syndicate structure

“…For example, the coefficients of the CEO vega‐to‐delta ratio bear the opposite sign of the coefficients of the CEO inside debt variables. This result is consistent with the empirical results found in Chen (2014) that CEO risk‐taking incentives affect the structure of syndicated loans because managerial risk‐taking incentives exacerbate borrower moral hazard. Larger borrowing firms are associated with bank loans with larger syndicates (as in the number of lenders).…”

“…This has a subsequent impact on the structure of syndicated loans. Because lead arrangers' ownership portion of syndicate loans serves as a signal of credible commitment to monitoring the borrowing firms, the portion of syndicate loans that is held by the lead arrangers should decrease in tandem with borrowing firms' credit risks (e.g., Chen, 2014; Lin et al, 2012). Therefore, the CEO inside debt holdings of borrowing firms should be negatively related to the portion of syndicate loans held by the lead arrangers and the concentration level of the syndicate loans.…”

“…Jensen and Meckling (1976) argue that the incentive effects of CEO inside debt holdings are more pronounced when the CEO debt‐to‐equity ratio is greater than that of the firm, i.e., the CEO to firm debt‐to‐equity ratio exceeds one. To measure the syndicate loan structure, we employ four measures that are similar to those used in recent empirical studies (e.g., Chen (2014); Lin, Ma, Malatesta, & Xuan (2012); Sufi (2007)): the total number of lenders in a syndicate loan, the amount of a loan held by the lead arrangers, the percentage of a loan held by the lead arrangers and a Herfindahl index of lenders' shares in a syndicate loan. A greater number of lenders in a syndicate indicate that the syndicate is less concentrated.…”

“…The second stream of work is related to the rapidly growing body of empirical studies on the structure of syndicate loans over the last decade. The extant literature has shown that the structure of syndicate loans is influenced by the information opacity level of borrowing firms (Lee & Mullineaux, 2004; Sufi, 2007), borrowing firms' accounting information quality (Ball, Bushman, & Vasvari, 2008), lead arrangers' reputation (Gopalan et al, 2011), borrowing firms' ownership structure (Lin et al, 2012) and the CEO risk‐taking incentives of borrowing firms (Chen, 2014). In this paper, we identify another important yet unexplored managerial characteristic that influences the structure of syndicate loans.…”

“…22For example, Lin et al (2012) find that borrowing firms that have a greater divergence between ownership rights and cash flow rights have fewer participant banks in a syndicate, and the lead banks are asked to maintain a larger amount of loans. Chen (2014) shows that borrowing firms with greater CEO risk‐taking incentives are usually associated with a more concentrated syndicate, and the lead arrangers are required to hold a larger portion of the syndicate's loans.…”