Strategic Syndication : Is Bad News Shared in Loan Syndicates?

We investigate whether lead arrangers opportunistically withhold their private information from participant lenders and how this behavior affects the structure of loan syndicates. Using an FDA inspection database assembled through Freedom of Information Act (FOIA) requests, we show that lead arrangers hold less of a loan when the borrower experiences a bad inspection outcome prior to its issuance. This effect is stronger when lead arrangers are more likely to be informed, as measured by higher inspection materiality and lead arrangers submitting FOIA requests to the FDA prior to a loan's issuance. Furthermore, the influence of inspection outcomes is mitigated through both voluntary disclosure by the borrower and mandatory disclosure imposed by the Open Government Initiative. Overall, our results provide robust evidence that lead arrangers exploit their informational advantage at the expense of the participant lenders