Financial Institutions Network and the Certification Value of Bank Loans

Abstract

Social networks play an important role in mitigating informational frictions related to financial intermediation, especially bank lending. We investigate the effect of the network of financial institutions on the certification value of bank loans using data on syndicated loans to European companies. We find that the presence of more central leaders in a syndicate substantially increases the stock market's reaction to loan announcements. This certification value is reinforced when informational frictions are more important but vanishes when there are severe disruptions in the functioning of financial markets, such as during the financial crisis of 2008.

Friends with Values – The Impact of Reputable Lead Arranger and External Auditor on Borrower’s Loan Terms

“…He finds that the stock market reacted favorably to bank loan announcements, particularly when the bank is reputable. Similarly, Godlewski and Sanditov (2018) find positive reactions of loan announcement to the stock market. The result depends on the identity of the lender, and if the lender is more reputable, measured by its centrality, then the effect is substantial.…”

Private Debt Renegotiation and Financial Institutions’ Network

“…6 We now turn to the definition of the characteristics of lenders' individual positions within a syndicated lending network. 7 We focus on the three most commonly used centrality measures introduced by Freeman (1979): degree centrality, closeness centrality, and betweenness centrality (Baum et al, 2003;Godlewski et al, 2012;Godlewski and Sanditov, 2018;Houston et al, 2018). These three measures are our main explanatory variables in the subsequent regressions.…”

“…On the IPO market, central underwriters are associated with more successful, greater valuation and liquidity, and larger returns offerings (Bajo et al, 2016). Central VC firms have better fund performance (Hochberg et al, 2007), while central lenders charge lower interest rates to their borrowers (Engelberg et al, 2012;Godlewski et al, 2012) and provide a significant market certification effect (Godlewski and Sanditov, 2018).…”

Adverse Selection and Credit Certificates: Evidence from a P2P Platform

“…Gaining access to bank loans from financial institutions is another kind of certificate that signals the promising prospects of a firm (James, 1987;Lummer and McConnell, 1989;Best and Zhang, 1993). The corporate finance literature also documents that syndicated loans (Focarelli et al, 2008;Godlewski and Sanditov 2018), project loans (Gatti et al, 2013), stapled loans (Aslan and Kumar, 2017) and loan renegotiation (Godlewski, 2015) have similar certificate effects. One crucial assumption in these studies is that the cost of obtaining certificates is inversely related to individuals' quality.…”