Working Paper: NBER ID: w29859
Authors: Thomas Schneider; Philip Strahan; Jun Yang
Abstract: Relative performance evaluation (RPE) intensifies competitive pressure by tying executive compensation to the profits of rivals. We show that these contracts make loan syndication harder by reducing banks’ willingness to participate in loans underwritten by banks named in their RPE contracts. Lead arranger banks which are more frequently named in RPE hold larger shares of the loans they syndicate, and their borrowers face higher spreads. These banks, in turn, lose market share to banks less likely to be named in RPE. Our results highlight the tension between the normal benefits of competition versus the need for cooperation in loan syndication.
Keywords: syndicated lending; relative performance evaluation; bank competition; executive compensation
JEL Codes: G20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| RPE contracts (K12) | banks' willingness to participate in loans arranged by rival banks (G21) |
| RPE contracts (K12) | lead arrangers' share of loans syndicated (F34) |
| RPE contracts (K12) | borrowers' loan spreads (G21) |
| RPE contracts + loan syndication risk (F34) | banks' participation in loans (G21) |