Does Poor Performance Damage the Reputation of Financial Intermediaries? Evidence from the Loan Syndication Market





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    • Washington University in St. Louis, Georgia Institute of Technology, and University of Houston, respectively. The authors thank Utpal Bhattacharya, John Graham, Manju Puri, Michael Roberts, David Robinson, Sheridan Titman, S. Viswanathan, and the seminar participants at Duke University, the Chicago Fed Bank Structure Conference, the Fifth Corporate Finance Conference at the Olin Business School, 2009 Financial Intermediation Research Society Conference at Prague and discussant Victoria Ivashina, 2008 European Finance Association Meetings at Athens and discussant Evgeny Lyandres, 2008 Financial Economics and Accounting Conference at UT Austin and discussant Chris Parsons, Indian School of Business, Indiana University, IU-Notre Dame-Purdue Conference and discussant Shane A. Corwin, University of Houston, University of Texas at Dallas, and Washington University for their helpful comments. An earlier draft of the paper was titled “How do defaults affect lead arranger reputation in the loan syndication market?”


We investigate the effect of poor performance on financial intermediary reputation by estimating the effect of large-scale bankruptcies among a lead arranger's borrowers on its subsequent syndication activity. Consistent with reputation damage, such lead arrangers retain larger fractions of the loans they syndicate, are less likely to syndicate loans, and are less likely to attract participant lenders. The consequences are more severe when borrower bankruptcies suggest inadequate screening or monitoring by the lead arranger. However, the effect of borrower bankruptcies on syndication activity is not present among dominant lead arrangers, and is weak in years in which many lead arrangers experience borrower bankruptcies.