Corporate Ownership Structure and Bank Loan Syndicate Structure

Using a hand-collected dataset, the authors examine the relationship between corporate ownership and bank loan syndicate structures. They discover that divergence between control and cash-flow rights of a borrowing firm’s largest ultimate owner has a significant impact on the concentration and composition of the firm’s loan syndicate. The effects of excess control rights on the syndicate structure is more pronounced for globally opaque firms, for firms with higher cash-flow rights dispersion across large owners, and for firms in economically troubled countries. In contrast, the relationship between control-ownership divergence and syndicate structure is mitigated by the lead arranger’s reputation and lending relationship with the borrowing firm as well as by strong shareholder rights and good credit information sharing systems. Overall, the results confirm that the deviation of control and cash-flow rights in the borrowing firms exacerbates potential tunneling and other moral hazard activities by large shareholders, thereby increases the credit risk and monitoring needs. Thus, the lenders form syndicates with structures that facilitate enhanced due diligence and monitoring efforts as well as the syndication process.