The Effect of Banks’ Financial Reporting on Syndicated Loan Structures

The delegation by syndication loan participants of loan screening and monitoring to lead lenders to avoid duplicate effort creates information asymmetry and associated agency problems between the lead arrangers and participants. Syndicated loan structures are designed to mitigate these information problems. These problems might also be affected by the lead arrangers financial reporting. We examine whether lead arrangers’ loan loss provision accounting information affects loan syndication structures. We hypothesize and find that, when lead arrangers’ loan loss provision can better capture subsequent charge offs (i.e., higher provision validity), lead arrangers retain lower fractions of syndicated loans and the propensity of having multiple lead arrangers is lower in a syndicate. We further find that the importance of lead arrangers’ accounting information on syndication structures is attenuated by lead arrangers’ previous syndicating relationships with participating banks, participants’ previous lending relationships with the borrower, and lead arrangers’ past lending relationships with the borrower. Our study contributes to the literature by exploring how information asymmetry between lead arrangers and participating banks influences syndication structures