Corporate Governance and Loan Syndicate Structure

Sreedhar Bharath, Sandeep Dahiya, and Issam Hallak

Firms with greater shareholder rights have a greater risk-shifting incentive requiring more lender monitoring. Thus, reduction in shareholder rights implies more diffused (less monitoring intensive) loan syndicates. Using the passage of US second-generation antitakeover laws as an exogenous shock that reduced shareholder rights as a natural experiment, we find that loan syndicates became significantly more diffuse after the passage of these laws. These results are confirmed in a large sample of bank loans made during the 1990-2007 period when the loan syndicate market matured. Our results show how corporate governance causally affects financial contracting and creditor control in firms.