Monitoring, Financial Distress, and the Structure of Commercial Lending Syndicates

We examine the size and composition of commercial lending syndicates. Syndicates are smaller and more concentrated when there is little information about the borrower, when credit risk is relatively high, and when a loan is secured. This suggests syndicates are structured to enhance monitoring efforts and to facilitate renegotiation if borrowers become financially distressed. Since loan sales can change a syndicate's structure, lead banks often constrain such activity. Limiting resales results in larger, more diffuse syndicates at the loan origination stage, however. Syndicates also grow larger and more diffuse when arrangers are more reputable, when loans have longer terms to maturity, and when borrowers hold more growth options. Our results are robust in a sample restricted to borrowers with traded equity or with credit ratings. The findings for composition likewise are robust when we control for potential endogeneity bias and for the influence of syndicate size on composition.