Private Debt Syndicates: Governance, Networks, and Syndicate Structure

I examine the primary market for syndicated private credit agreements to U.S. firms within the context of contract theory with information asymmetries between contracting parties in a repeated game. Specific governance mechanisms determine a firm\u27s cost of borrowing in syndicated credit agreements. Firms with governance mitigating agency risk between stakeholders, i.e. independent boards, strong shareholder monitoring, and greater CEO pay-performance sensitivity, enjoy lower borrowing costs. The interests of creditors and shareholders diverge with regard to external governance. Lenders charge higher spreads to firms at greater risk of acquisition and reward stronger firms with price concessions when they possess staunch anti-takeover provisions. With regard to the networks I find that CFO centrality, the size and influence of network connections, affects the structure and cost of firm private debt. Specifically, powerfully networked CFOs negotiate more flexible contracts and lower loan spreads. More favorable loan terms do not appear to be inappropriate as these borrowers do not subsequently under-perform relative to their peers. I conclude that CFO centrality decreases information asymmetries and agency problems through increased information flows and reputational effects. The syndication process itself is a two stage process. The first stage is the underwriting process wherein lead arrangers perform due diligence on the borrower and the parties agree to loan terms. The second stage is the syndication process wherein lead arrangers invite non-arrangers to participate in the primary offering. I find that asymmetric information and agency concerns affect not only the terms of the loan but also the structure of the syndicate. Greater information asymmetry increases loan spreads and the concentration of the syndicate; non-lead arrangers are less willing to participate in the offering when information asymmetries are more severe between borrowers and non-lead arrangers and between underwriters and participant lenders. I find that when the proposed spread differs from that of a typical offering potential creditors are less willing to participate, that is, an atypical spread is itself an indicator of asymmetric information between originators and potential participants. These effects are mitigated, but not eliminated, by previous lending relationships between borrowers and lenders and previous lead-participant syndications