The "Dominant Bank Effect:" How High Lender Reputation Affects the Information Content and Terms of Bank Loans

David Gaddis Ross

The Review of Financial Studies, 2010, vol. 23, issue 7, 2730-2756

Abstract: Three large banks control over half of the U.S. commercial loan market by volume through the syndication process. Using attributes of a borrower's location to instrument for lender-- borrower matching, I show that the borrower stock price response to a loan announcement is more favorable if one of these dominant banks is the lender, especially if the borrower is "opaque." I then show that these banks charge lower interest rates and are more likely to lend without the protection of a borrowing base. The results suggest that the dominant banks have a particularly high reputation for screening and monitoring borrowers. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Date: 2010
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