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Lender Exposure and Effort in the Syndicated Loan Market


  • Nada Mora

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    • Nada Mora is an Economist in Federal Reserve Bank of Kansas City, 1 Memorial Drive, Kansas City, MO 64198, USA. Mora can be contacted via e-mail: The views expressed herein are those of the author and do not necessarily reflect the positions of the Federal Reserve Bank of Kansas City or the Federal Reserve System. I am grateful to Viral Acharya for his suggestions on an early draft and to an anonymous referee for helping me improve the article. I also thank participants at the Federal Reserve Bank of Kansas City, the Finance Workshop at Kansas University, Claire Rosenfeld and others at the Mid-Atlantic Research Conference in Finance (MARC) at Villanova University. Jacob Schak provided excellent research assistance. Any remaining errors are my own.


This article tests for asymmetric information problems between the lead arranger and the participants in a lending syndicate. One problem comes from adverse selection, whereby the lead has a private informational advantage over participants. A second problem comes from moral hazard, whereby the lead puts less effort in monitoring when it retains a smaller loan share. Applying an instrumental variables strategy using lending limits, borrower performance is improved by increasing the lead's share. The focus is on separating moral hazard from adverse selection and the results are consistently indicative of monitoring. First, the lead's share is more important for revocable credit lines than for fully funded term facilities. Second, a lead with greater liquidity risk reduces its share resulting in worse borrower performance, but its liquidity risk does not affect the quality of credits it chooses to syndicate in the first place. Third, covenants are paired with a higher lead share, and the sensitivity between share and borrower ex post performance is greater on loans with more covenants.