The Pricing Effect of Certification on Syndicated Loans

In order to verify whether a delegated monitor can certify its ability to perform its assigned tasks, we test whether syndicated loans in which a larger share of the facility is retained by the arranger have lower interest rates. For a large sample of syndicated loans in over 80 countries during the nineties, we find this negative correlation between the interest rate on the facility and the share of the loan subscribed. The effect of certification is greater for facilities that are characterized by greater due diligence and monitoring efforts: smaller ones, those used for debt repayment, and those granted to smaller borrowers and to borrowers new to the syndicated loan market. Further, for listed companies the announcement effect of the new loan on the stock price is an increasing function of the portions of the loan retained by the arranger