Contracting in the Dark : The Rise of Public-Side Lenders in the Syndicated Loan Market

We document a novel trend in syndicated lending where some participants voluntarily waive their rights to access borrowers’ private information. Although these public-side lenders are unable to use private information to evaluate borrowers’ creditworthiness, forgoing their access to private information allows them to avoid the scrutiny associated with the potential leakage of borrowers’ private information into public securities markets. We find that these costs and benefits explain participants’ decision to join syndicates as public-side lenders. Public-side lenders are more likely to participate in loans syndicated by reputable lead arrangers and those that include more restrictive monitoring provisions, which mitigate these lenders’ information disadvantage. The participation of public-side lenders is also more likely when there is greater regulatory oversight of potential misuse of private information. We further show that the presence of public-side lenders in syndicates is positively associated with the participation of lenders that are less likely to have robust internal information barriers, such as institutional investors and small and foreign banks. Finally, we find that public-side lenders are positively associated with the likelihood and timeliness of ex-post renegotiations, suggesting that a more limited access to private information can improve contracting efficiency. Collectively, our results provide new insights on the demand for and the use of private information in loan contracting and how public-side lenders affect syndicated lending dynamics