Within-syndicate conflicts, loan covenants, and syndicate formation

We study how conflicts within a lending syndicate affect loan contract and syndicate formation. We argue that loan provisions serve an important dual function: In addition to moderating borrowerlender conflicts, they reduce within-syndicate conflicts. We show that greater potential for within-syndicate conflicts is associated with more and stricter covenants. Loans are less restrictive when the interests of participants and the lead arrangers are better aligned, for example, when participant-banks have stronger relationships with the lead arranger or hold borrower's equity (indirectly). Overall, our results show that covenant choice, syndicate formation, and lead arranger's loan allocation all play an important role in reducing within-syndicate conflicts. KEYWORDS bank loans, conflicts of interest, covenants, lending syndicate, monitoring
1 | INTRODUCTION Many financial services are delivered by financial intermediaries organized as syndicates. However, the intermediaries in a syndicate may be asymmetrically informed and have divergent interests, creating the [...]