Ownership and Asymmetric Information Problems in the Corporate Loan Market - Evidence from a Heteroskedastic Regression (WP 2009-1)

Abstract

In this paper, we examine whether asymmetric information problems exist in the corporate loan market, and whether ownership of loans provides lenders the incentive to mitigate asymmetric information problems. We attempt to identify asymmetric information problems by testing the prediction of Leland and Pyle (1977), that loan ownership provides incentives for lenders to alleviate asymmetric information problems by engaging in ex-ante screening of borrowers' creditworthiness. We use a heteroskedastic regression to provide evidence of a statistically significant, positive association between several measures of loan ownership by lenders with responsibility for negotiating loan contract terms, and the quantity of non-publicly observable information incorporated into interest rate spreads on corporate loans, which we interpret as evidence of ex-ante screening. We suggest that our results are consistent with the assertions that: (1) asymmetric information problems exist in the corporate loan market; (2) ownership stakes provide lenders with the necessary incentives to acquire borrowers' private information to overcome asymmetric information problems; and (3) originating loans for distribution has weakened, but not eliminated, lenders' incentives to overcome asymmetric information problems.

Authors

Lewis Gaul and Viktors Stebunovs