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Do multiple credit ratings affect syndicated loan spreads?

Danilo Drago and Raffaele Gallo

Journal of International Financial Markets, Institutions and Money, 2018, vol. 56, issue C, 1-16

Abstract: We analyze whether soliciting multiple ratings leads to lower syndicated loan spreads. Our results document that banks apply, on average, lower spreads to multi-rated firms. This effect depends on the reduction of information asymmetry about borrowers’ creditworthiness (information production hypothesis) and on the benefits in regulatory terms (regulatory certification hypothesis). In addition, consistent with the rating shopping hypothesis, we find that banks price the risk that borrowers shopped for better ratings, especially in crisis periods. Our results also hold when considering crisis periods, the unobserved heterogeneity of lenders, the use of rating-based pricing, and adopting a matched sample.

Keywords: Credit rating; Loan spread; Financial regulation; Syndicated loan; Multiple ratings (search for similar items in EconPapers)
JEL-codes: G21 G24 G28 G32 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.intfin.2018.04.002

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Journal of International Financial Markets, Institutions and Money is currently edited by I. Mathur and C. J. Neely

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