(1991). Applied Linear Regression Models. Journal of Quality Technology: Vol. 23, No. 1, pp. 76-77.

Applied Linear Regression Models

I empirically explore the syndicated loan market, with an emphasis on how information asymmetry between lenders and borrowers influences syndicate structure and on which lenders become syndicate members. Consistent with moral hazard in monitoring, the lead bank retains a larger share of the loan and forms a more concentrated syndicate when the borrower requires more intense monitoring and due diligence. When information asymmetry between the borrower and lenders is potentially severe, participant lenders are closer to the borrower, both geographically and in terms of previous lending relationships. Lead bank and borrower reputation mitigates, but does not eliminate information asymmetry problems. SYNDICATED LOANS ARE A LARGE and increasingly important source of corporate finance. Nonfinancial U.S. businesses obtain almost $1 trillion in new syndicated loans each year, which represents approximately 15% of their aggregate debt outstanding, and of the largest 500 nonfinancial firms in the Compustat universe in 2002, almost 90% obtained a syndicated loan between 1994 and 2002. Indeed, according to the American Banker, syndicated lending represents 51% of U.S. corporate finance originated, and generates more underwriting revenue for the financial sector than both equity and debt underwriting (Weidner (2000)). The market for syndicated loans has also experienced strong growth, going from $137 million in 1987 to over $1 trillion today. However, despite the importance of syndicated loans, research on their role in U.S. corporate finance is limited. A syndicated loan is a loan whereby at least two lenders jointly offer funds to a borrowing firm. The “lead arranger” establishes a relationship with the firm, negotiates terms of the contract, and guarantees an amount for a price range.

/pdf/information-asymmetry-and-financing-arrangements-evidence-ho4ean4h4p.pdf

Information Asymmetry and Financing Arrangements: Evidence from Syndicated Loans

Using a new dataset of bid and offer quotes for credit default swaps, we investigate the relationship between theoretical determinants of default risk and actual market premia using linear regression. These theoretical determinants are firm leverage, volatility and the riskless interest rate. We find that estimated coefficients for these variables are consistent with theory and that the estimates are highly significant both statistically and economically. The explanatory power of the theoretical variables for levels of default swap premia is approximately 60%. The explanatory power for the differences in the premia is approximately 23%. Volatility and leverage by themselves also have substantial explanatory power for credit default swap premia. A principal component analysis of the residuals and the premia shows that there is only weak evidence for a residual common factor and also suggests that the theoretical variables explain a significant amount of the variation in the data. We therefore conclude that leverage, volatility and the riskfree rate are important determinants of credit default swap premia, as predicted by theory.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID601082_code238096.pdf?abstractid=601082&rulid=5403153&mirid=4

The Determinants of Credit Default Swap Premia

This paper develops a framework for analyzing the impact of macroeconomic conditions on credit risk and dynamic capital structure choice. We begin by observing that when cash flows depend on current economic conditions, there will be a benefit for firms to adapt their default and financing policies to the position of the economy in the business cycle phase. We then demonstrate that this simple observation has a wide range of implications for corporations. Notably, we show that our model can replicate observed debt levels and the countercyclicality of leverage ratios. We also demonstrate that it can reproduce the observed term structure of credit spreads and generate strictly positive credit spreads for very short maturities. Finally, we characterize the impact of macroeconomic conditions on the pace and size of capital structure changes, and debt capacity. A number of new predictions follow.

/pdf/capital-structure-credit-risk-and-macroeconomic-conditions-1l4ii1ys03.pdf

Capital Structure, Credit Risk, and Macroeconomic Conditions

http://www.nccr-finrisk.uzh.ch/media/pdf/wp/WP229_5.pdf

Capital structure, credit risk, and macroeconomic conditions ☆

We examine the impact of the U.S. bankruptcy procedure on the valuation of corporate securities and capital structure decisions. We provide closed-form solutions for corporate debt and equity values when defaulting firms can either liquidate their assets or renegotiate outstanding debt under court protection. We show that the possibility to renegotiate the debt contract (i) has an ambiguous impact on leverage choices and (ii) increases credit spreads on corporate debt. The sharing rule of cash flows during bankruptcy has a large impact on optimal leverage. By contrast, credit spreads on corporate debt show little sensitivity to this very parameter.

https://www.jstor.org/stable/10.1086/381280

Capital structure and asset prices: Some effects of bankruptcy procedures

This paper examines the impact of the U.S. bankruptcy procedures on the valuation of corporate securities and capital structure decisions. We provide closed-form solutions for the values of corporate debt and equity when defaulting firms can either liquidate their assets or renegotiate outstanding debt under the Court protection. The paper shows that the possibility to renegotiate the debt contract (i) has an ambiguous impact on leverage choices and (ii) unambiguously increases credit spreads on corporate debt. The analysis also reveals that the sharing rule of cash flows during bankruptcy has a large impact on optimal leverage. By contrast, credit spreads on corporate debt show little sensitivity to this very parameter.

/pdf/capital-structure-and-asset-prices-some-effects-of-3w71fp7641.pdf

Capital Structure and Asset Prices: Some Effects of Bankruptcy Procedures

The aim of this paper is to analyze the agency structure of loan syndicates in light of two alternative hypotheses. On one hand, the specialization hypothesis, consistent with Das and Nanda (1999), claims that multiple co-agents arise in loan syndicates because of the different competitive advantages they have for performing all the administrative tasks. On the other hand, the monitoring hypothesis states that multiple co-agents in loan syndicates are the result of the delegation of monitoring that mitigates informational asymmetry problems, as put forward by Strausz (1997). These alternative explanations induce different correlations between the agency structure of the syndicate and observable characteristics of the syndicated loan agreement. We derive testable implications and test them using the large-scale Dealscan database. We find strong evidence supporting the specialization hypothesis whereas results concerning the monitoring hypothesis are mixed.

The Agency Structure of Loan Syndicates

Empirical studies on credit spread determinants are predicated on the presence of a single-regime over the entire sample period and thus find limited explanatory power. We show that a single regime model hides the fact that the explanatory variables take on different loadings across changing patterns in credit spreads. We capture these hidden effects by modeling endogenous (rating-specific) regimes for credit spreads. We find that in a two regime-based model traditional determinants have significant explanatory power consistent with the prediction of structural models, yet their importance changes across regimes -- some variables have their effects strengthen, weaken or even reverse signs across regimes. We also investigate the differing behavior of these loadings across different specifications of the economic cycle and find that endogenous regimes best capture the hidden effects of these variables with the highest explanatory power for the same set of variables.

Credit Spread Changes within Switching Regimes

Leaders of loan syndicates often delegate some administrative tasks to banks known as co-agents. One reason is that co-agents are specialized banks that help split the costs of managing the syndicate. Another reason is that co-agents monitor the leader on behalf of syndicate members to mitigate informational asymmetry problems. Large sample tests on the Dealscan database provide support for both arguments. Evidence of repeated contracting between the same banks explains the moderate magnitude of monitoring effects.

Pascal François

Papers

Capital structure and asset prices: Some effects of bankruptcy procedures

Capital Structure and Asset Prices: Some Effects of Bankruptcy Procedures

The Agency Structure of Loan Syndicates

Credit Spread Changes within Switching Regimes

The Agency Structure of Loan Syndicates