Diversification or Specialization? An Analysis of Distance and Collaboration in Loan Syndication Networks

In this paper, we study the organizational form of loan syndicates, how banks choose their syndicate partners and how this affects syndicate structure, loan pricing, and borrower performance. We develop a set of novel measures in terms of the distance in lending expertise with respect to both borrower industry and borrower geographic location between any two lenders and relate these measures to the organizational form of loan syndicates. We find that lead arrangers choose banks that have a similar focus in terms of lending expertise, i.e., close competitors, and give these banks more senior roles in the syndicate. We also find that these more senior syndicate members hold larger loan shares. Borrowers, especially those presenting more severe information asymmetry, benefit from such an organizational design by paying lower interest spreads. These results support the hypothesis that syndicate members that are close to lead arrangers are delegated some responsibilities such as screening and monitoring and thus can lower the overall loan syndication costs. We do not find, however, significant evidence of more effective ex-post monitoring from such a strategy based on loan default when ex-ante borrower quality and creditworthiness is taken into account. This implies that banks collaborate to pool on screening rather than monitoring