Shareholder Rights and Syndicate Structure

Abstract

We examine the structure of lending syndicates formed to provide credit to the non-financial U.S. firms between 1990 and 2007. We find a significant relationship between the level of shareholder rights (as proxied by GIndex) of the borrowing firms and composition of their lending syndicate. Higher shareholder rights (i.e. low GIndex) firms are associated with a more concentrated syndicate (both in terms of Herfindahl index of share of loans retained by syndicate members as well as the percent of total loans retained by the lead bank). More concentrated syndicates reflect the need for stronger monitoring by the lead lender. We test two alternative explanations as to why high shareholder right borrowers need more intense monitoring implied by higher lender syndicate. First, we test if the higher syndicate concentration observed for borrower with stronger shareholder rights, arises due to potential syndicate members anticipating a greater risk of such borrowers being acquired. The higher take-over likelihood could be interpreted by the lenders as a potentially higher future financial risk. Thus, the more concentrated syndicate structure arises to mitigate this risk. The second potential explanation we test is based on agency theory of debt. For firms with high shareholder rights, managers are arguably better aligned with the firm's shareholders. Lenders to such firms would be especially concerned about risk-shifting behavior where managers may choose projects with excessive risk leading to wealth transfer from the lenders to the shareholders. We find support for the risk-shifting argument for syndicate structure. We do not find strong evidence that potential lenders take the risk of take-over into account when forming the lending syndicate.