Private Information, Agency Problems and Determinants of Loan Syndications: Evidence from 1987-1999

This paper examines one of the most important sources of financing, syndicated loans. First, we revalidate results in Dennis and Mullineaux (2000) with a larger sample. Second, two new variables - the presence of performance pricing in a lending contract and the annual average number of deals originated by the managing agent - are analyzed as relevant variables associated with reputation and agency problems. We find that the presence of performance pricing and the reputation of the managing bank as reflected by the annual average number of deals can attenuate agency problems, and thus increase the prospect of a loan being syndicated and also increase the proportion of a loan sold. Finally, we perform direct tests of the role of private information and the prevalence of agency problems in loan syndications through proxies for changes in borrowers' S&P senior debt ratings. We find evidence that the lead bank syndicates a larger proportion of a loan subsequently upgraded. This implies that agency problems do not prevail in loan syndications.

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