The Effect of Banks’ Financial Reporting on Syndicated Loan Structures

We examine whether lead lenders’ commercial and industrial loan (C&I) loss provision validity, measured as the extent of C&I provisions capturing subsequent net charge offs, affects the fraction of loans retained by lead lenders. Consistent with the argument that provision validity provides information about banks’ underlying screening and monitoring abilities, we first document positive associations between C&I provision validity and both ex post monitoring outcomes and cross-sectional variation in equity market reactions to borrowers’ loan announcements. We then find that the fraction of syndicated loans retained by lead lenders decreases with C&I provision validity but not with non-C&I provision validity, suggesting that C&I provision validity does not simply capture banks’ overall operation efficiency or risk taking. We further find that the importance of lead lenders’ C&I provision validity on syndication structures is attenuated by the existence of the borrower’s credit rating, lead lenders’ previous syndicating relationships with participating banks, and participants’ previous lending relationships with the borrower, suggesting that our measure captures an information effect, rather than merely the lead lenders’ attributes. Our study contributes to the literature by exploring how lead lenders’ accounting information affects information asymmetry between lead lenders and participating banks and thereby influences syndication structures.