Information Asymmetry and the Pricing of Private Debt - Evidence from European Syndicated Loans

Abstract

We analyze a sample of UK syndicated loan contracts, containing detailed firm data for both private and public borrowers for the time period 1996 through 2005 to explore the impact of information asymmetry on loan spreads. Consistent with the asset pricing literature, we find that lenders charge systematically higher spreads when the borrower lacks publicly available information. However, previous firm-lender relationships mitigate this information asymmetry and reduce the spread. Additionally, we find evidence that an increase in the loan share retained by the mandated arranger mitigates informational frictions within the lending syndicate and consequently reduces the interest spread charged to the firm. Therefore, we conclude that informational frictions between informed mandated arrangers and uninformed participant banks impose an additional syndication-specific information premium on the borrower. To the best of our knowledge, this paper is first to empirically explore whether loan spreads charged to firms are affected by the amount of publicly available firm information, prior firm-lender relationships and bank reputation. Further, the paper addresses the endogenous link between loan spreads and syndicate structure by employing actual bank loan portfolio data.