Local versus foreign banks: A home market advantage in loan syndications

- Domestic banks are informationally superior to their foreign counterparts.
- Loans arranged by domestic banks carry lower interest rates.
- Loans arranged by domestic banks have longer maturities.
- Loans arranged by domestic banks are less likely to require collateral.
- Results are robust to the non-randomness of the lead bank choice.

This paper investigates the contract terms of local versus foreign bank lead loan syndications to test two opposing theories: the home market advantage gained by closer geographical proximity and soft information from existing banking relationships, versus the hold-up problem where banks exploit their information advantage at the borrower's expense. The home market advantage was supported with domestic banks informationally superior to their foreign counterparts. Loans arranged by the former carry lower interest rates, have longer maturities, and are less likely to require collateral. These results are robust after controlling for the non-randomness of the lender-borrower matching process.