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Why Larger Lenders obtain Higher Returns: Evidence from Sovereign Syndicated Loans

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Author Info
Issam Hallak () (Department of Finance, Bocconi University)
Paul Schure () (Department of Economics, University of Victoria)

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Abstract

Lenders that fund larger shares of a syndicated loan typically receive larger percentage upfront fees than smaller lenders. This paper studies sovereign syndicated loan contracts in the period 1982-2006 to explore this fact. In our dataset of 288 contracts large lenders obtain on average an 8.5 percent higher return on their funds than small lenders who join the syndicate. Our analysis shows that the return premium large lenders receive is positively affected by anticipated future liquidity problems of the borrower and by the number of banks. Our analysis also reveals that the return premium is not used to control the number of banks that join the syndicate. We interpret our findings as indicating that the fee structure on syndicated loans incorporates anticipated costs associated with a borrower illiquidity, notably the costs of coordinating the workout and providing liquidity insurance, but that the fee structure does not serve the additional purpose of curbing these costs by reducing the number of lenders in the syndicate.

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Publisher Info
Paper provided by Department of Economics, University of Victoria in its series Department Discussion Papers with number 0802.

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Length: 38 pages
Date of creation: 31 Dec 2008
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Handle: RePEc:vic:vicddp:0802

Note: ISSN 1914-2838
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Related research
Keywords: Financial Intermediation; Syndicated loans; Sovereign debt; Relationship Lending; Debt Renegotiation; Illiquidity; Number of Lenders;

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Find related papers by JEL classification:
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

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