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.

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