CEO entrenchment and loan syndication

Unlike a traditional bank loan with only a single creditor, a syndicated loan involves a group of lenders: a lead arranger and a number of participant lenders. The syndication process, therefore, generates an additional dimension of agency problem between the lead arranger and the participant lenders, in addition to the traditional agency cost of debt between the borrower and the lender (Diamond, 1984; Holmstrom and Tirole, 1997). We investigate the association between CEO entrenchment of the borrowing firm and the loan syndication concentration and composition. Several results are obtained. First, in syndicated loans made to firms with entrenched CEOs, the number of participant lenders and their share in the loan are smaller; the lead arranger retains a larger loan share. Second, these loans are held more closely (in a more concentrated manner). Third, foreign lenders are less involved in these loans; the number of foreign lenders and their shares in the loan are both smaller. Fourth, we find that the results are mainly driven by loans syndicated by non-dominant lead arrangers. Our findings shed light on the two types of agency problems associated with syndicated loans; between lenders and the borrowers and between lead arranger and participant lenders, and have important implications for shareholders, creditors and regulators.