Information Production and Price Discovery in the Syndicated Loan Market

My dissertation studies information production and price discovery in the syndicated loan market. Over the past twenty years, collateralized loan obligations (CLOs) and the market-flex model have changed the landscape of the loan market. In the first chapter, I document that CLOs make up more than 60% of the investments in syndicated loans in recent years. A syndicated loan is in the portfolios of dozens of CLOs and they often disagree on the value of the loan. I examine how the disagreement affects the trading behavior of CLOs and the loan illiquidity in the secondary market. I find that such disagreement makes CLOs trade strategically by increasing trading frequency and decreasing trading amount. Dealers cannot differentiate the private signals in the market, which leads to the adverse selection concern and reduces the liquidity of a loan. Information possessed by dealers reduces the monopolistic power of diversely informed CLOs and attenuates the adverse selection concern. In the second chapter, we focus on the market-flex model and examine how lending relationship affects the pricing adjustments in the primary market of syndicated loans. Using a new dataset on loan pricing adjustments, we find that the lead bank makes fewer adjustments to the initial pricing terms of a syndicated loan and shortens syndication time when it has a stronger relationship with the borrower. A stronger relationship also reduces loan underpricing. A relationship lead bank relies less on information from syndicate members. Exogenous shocks to relationships caused by bank mergers and closures confirm our findings. We contribute to the literature by showing that relationship lending improves loan pricing efficiency. In the third chapter, we examine how the peer information benefits syndicate loan lending. We find that firms borrowing from and switching to their competitors’ banks pay lower loan spreads. The impact is stronger when the expected monitoring gains are higher and the expected costs are lower. A loan originated by a competitor’s bank has a lower share from the lead and experiences more frequent amendments. Our findings suggest that firms choose strategically to borrow from their competitors’ banks to reduce bonding costs