Lead arranger reputation and the structure of loan syndicates

• Information asymmetry affects syndicate lending and leads to both moral hazard and adverse selection problems.
• Information asymmetries between borrower and syndicate lead to moral hazard which can only be overcome by the most reputable arrangers.
• Information asymmetries within the syndicate lead to adverse selection only when low-reputation arrangers lend to opaque borrowers.

This study explores the effects of information asymmetry and arranger reputations on syndicated loan structures. The moral hazard problem arising from information asymmetries between borrower and syndicate can be overcome only by the most reputable arrangers. Both moral hazard and adverse selection problems appear when arrangers have an information advantage over other syndicate participants. However, the adverse selection problem arises only when low-reputation arrangers lend to opaque borrowers.