Bank Sectoral Specialization and Loan Pricing : Worldwide-Based Syndicated Loan Portfolios

We propose a worldwide-based loan portfolio to measure banks’ sectoral concentration that features prominently in episodes of bank specialization. We use the banks’ real loan allocation worldwide instead of the in-sample data to compute a bank specialization. We find that firms borrowing from banks with high specialization levels incur lower bank loan spreads. However, these results are mainly driven by borrowers with information disclosure advantages – that is, they are rated, using Big-4 auditors or with analysts' coverage. We also show that banks charge an extra spread from borrowers when the borrower's sector is the same as its banks' specialized sector. However, this rent would transfer to a discount once the bank is highly specialized. These findings are robust to using entropy as an alternative specialization measure and incremental to the effects by adding corporate environmental, social, and governance scores and ESG scores. We identify the causal relationships using borrowers' lead arranger switching as an event in the sample period. Using the difference-in-differences approach, instrumental-variable two-stage least squares (2SLS) regressions, propensity scores matching (PSM), and entropy balancing approach, we show that the findings are robust to addressing endogeneity concerns. The global financial crisis changed loan pricing from sectoral specialized banks. We provide evidence that specialized banks have advantageous sector-specific knowledge that engenders efficient screening and maintains a lower level of borrowers' probability of default afterward. The positive payoffs benefit banks and firms, and other confounding factors could not explain the drop in spreads