Does Lenders’ Perception of Trustworthiness in Borrowers Affect the Pricing and Design of International Syndicated Loans?

Topic:

Does Lenders’ Perception of Trustworthiness in Borrowers Affect the Pricing and Design of International Syndicated Loans?

Time&Date: 

 13:00-14:15 pm, 2019/11/8 (Friday)

Venue:

 Room 619, Teaching A

Speaker:

Dr. ByungHun Chung (Nanyang Technological University)

Abstract:

This paper studies whether lender’s trust in a borrower affects the pricing and design of loans in international syndicated loan markets and also the borrower’s reporting attribute. We find that when a lead bank of a syndicated loan trusts the borrower more, the bank charges lower interest and includes less restrictive covenants. We also show that lower lender’s trust in a borrower is associated with greater conditional conservatism in the borrower’s financial reports. Our additional tests support the following conjectures. First, during the Financial Crisis of 2008, lead banks retrench less from borrowers from more trusted countries. Second, when participant banks in a syndicated loan trust their lead bank more, they share greater proportion of the loan with the lead bank. This evidence further supports our argument that trust facilitates risk taking by sophisticated economic agents when there is a high information asymmetry. Overall, our evidence suggests that the lead bank’s trust not only affects how international syndicated loans are priced and designed, but also matters for borrowers’ financial reporting attribute.