Liquidity in the pricing of syndicated loans

We examine whether banks price expected liquidity in US syndicated term loans. Using extensive data we show that loans with higher expected liquidity have significantly lower spreads at origination, controlling for other determinants of loan spreads such as borrower, loan, syndicate and macroeconomic variables. A matched sample analysis confirms our results. We estimate that the pricing of expected liquidity results in annual savings of over $1.6 billion to the borrowers, in our sample alone. For the first time in the literature, we identify what influences the decision of financial intermediaries to make secondary markets for an asset, and the consequent pricing impact of this decision in the primary market.