Strategic syndication: is bad news shared in loan syndicates?

We investigate whether lead arrangers opportunistically withhold their private information from participant lenders and how this behavior affects the structure of loan syndicates. Using the setting of Food and Drug Administration (FDA) inspections and the exogenous shock to the inspection disclosure regime with the passage of the Open Government Initiative (OGI), we show that, following bad inspection outcomes, lead arrangers retain a larger loan share in the post-OGI period, when inspection outcomes are publicly disclosed by the FDA, compared to in the pre-OGI period, when there is no public disclosure. We also find that during the pre-OGI period, lead arrangers retain a lower loan share when a loan is issued following bad inspection outcomes compared to clean inspection outcomes. This effect is stronger when lead arrangers are more likely to be informed (as measured by their prior experience submitting Freedom of Information Act (FOIA) requests to the FDA and a higher inspection materiality) and when syndicate participants are less likely to be informed (as measured by their lack of prior FDA FOIA requests and lead arranger experience, and by the lack of borrowers’ voluntary disclosure of inspection outcomes). Our findings of the deterioration in borrowers’ performance following bad inspection outcomes and lead arrangers’ reputational losses in the post-OGI period further indicate lead arrangers’ opportunistic behavior. Overall, our results provide robust evidence that lead arrangers exploit their informational advantage at the expense of participant lenders.