The Value of Financial Intermediaries: Empirical Evidence from Syndicated Loans to Emerging Market Borrowers

Abstract

Empirical estimates of the benefit of financial intermediation are constructed by examining the role played by local banks in facilitating syndicated loans to borrowers in emerging market countries. Assuming that local banks possess a superior monitoring ability, the market is ideal for studying the value of intermediation since cross-border lending into emerging markets is plagued by particularly high information and agency costs and the supply of local bank capital is in limited short run supply. Using variation in the propensity of local banks to participate in foreign arranged syndicates, there are two economically important results. First, local banks are much more likely to participate in unconditionally riskier loans. Second, after controlling for borrower characteristics, loan characteristics, and the endogeneity of the local bank lending decision, loans with local bank participation have spreads that are 10 percent lower (29 basis points) than otherwise similar loans. Combined, the results support the conclusion that local banks, a particularly special type of financial intermediary, provide value by considerably reducing financing costs, especially for riskier borrowers.JEL Classification: G20, G21, G15.

Informational Frictions, Syndicate Structure, and Loan Pricing: New Evidence from International Lending

“…The positive and significant effect of Collateral (security‐indicator) on loan risk premium is in line with Altunbas and Gadanecz (), Berger and Udell (), Berger et al . (), and Nini (). In particular, Berger and Udell () find that the most risky borrowers are required to pledge collateral…”

The Impact of Information Asymmetry, Moral Hazard and the Structure of Funding on Corporate U.S. Dollars Loan Pricing: The Empirical Study in Indonesia the Period 1990-1997

“…: maturity (Gottesman and Roberts, 2002), non-price term of loans (Strahan, 1999); asymmetric information and moral hazard (Diamond, 1984;Berlin and Mester, 1992;Petersen and Rajan, 2002), legal issue (La Porta, et. al., 1997), pricing decisions for multi-products, regulation (McCauley and Seth, 1992), cross-monitoring (Booth, 1992;Chen, et al, 2000), creditor's characteristic (Coleman, et al, 2002), type of creditor, both domestic and foreign creditor (Chen, et al, 1996;Smith, 2003;Carey and Nini, 2003;Nini, 2004), creditor's reputation (Halak, 2002), type of creditor, both commercial and investment bank (Harjoto, et al,2000), credit risk and collateral (Booth and Chua, 1995). Several factors mentioned above are using credit risk concept, adverse selection caused by asymmetric information, and moral hazard caused by agency problems (Sinkey, 2002;Heffernan, 1996).…”

Effects of Foreign Institutional Ownership on Foreign Bank Lending: Some Evidence for Emerging Markets

“…Among the increasing foreign investment, the share contributed by institutional investors has grown rapidly (Stepanyan 2011), and institutional investors now become major players not only in developed countries but in emerging markets as well (Li et al 2006;Ferreira and Matos 2008). Second, international-syndicated lending has also become an important source of external finance in emerging markets and its size often exceeds that of equity markets (Nini 2004). Third, most importantly, it is premature to generalize the findings based on developed countries to developing ones because for the latter, corporate governance may operate in many different ways because of lack of necessary political and economic institutions for democracy and markets to well function (Berglöf and Claessens 2006).…”