Informational frictions, syndicate structure, and loan pricing: New evidence from international lending

We examine how syndicate structure affects loan pricing in international syndicated lending. Using extensive syndicated loan data across 103 countries from 1982 to 2012, we find that both measures of syndicate structure, the proportional number of lead arrangers, and the proportion of loan amount retained by lead arrangers in syndication, are significantly negatively related to loan risk premiums after controlling for contract and country characteristics. These findings indicate that, under informational frictions, as the riskiness of a borrower increases, the syndicate structure becomes more diversified in a way that lead arrangers and participating banks share the loan amount and the associated credit risk in syndication. Hence, syndicate participants collaboratively determine higher loan spreads to align higher compensation for active commitments and greater risk sharing of participating banks in syndication. Our results offer new evidence strongly supporting the diversified nature of syndicate structure but contradicting the concentrated nature of syndicate structure prevailing in existing studies.