David Ross

The "Dominant Bank Effect": How High Lender Reputation Affects the Information Content and Terms of Bank Loans

Abstract:
Three large banks control over half of the US commercial loan market by volume through the syndication process. Using attributes of a borrower's location to instrument for lender-borrower matching, I show that the borrower stock price response to a loan announcement is more favorable if one of these dominant banks is the lender, especially if the borrower is "opaque." I then show that these banks charge lower interest rates and are more likely to lend without the protection of a borrowing base. The results suggest the dominant banks have a particularly high reputation for screening and monitoring borrowers.

Source: Review of Financial Studies
Exact Citation:
Ross, David. "The "Dominant Bank Effect": How High Lender Reputation Affects the Information Content and Terms of Bank Loans." Review of Financial Studies 23 (2010): 2730-2756.
Volume: 23
Pages: 2730-2756
Date: 2010