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Working Papers, No. 2023-44, December 2023 Crossref
What Do Lead Banks Learn from Leveraged Loan Investors?

In leveraged loan deals, lead banks use bookbuilding to extract price-relevant information from syndicate participants. This paper examines the content of such information. We find that pricing adjustments during bookbuilding are highly informative, not only about investors’ required risk premium but also about borrower quality. A one-percentage-point increase in loan spread predicts a 0.8% higher excess return, a proxy for risk premium, over the first 3 months of secondary market trading. More importantly, it also predicts a 3% higher probability of subsequent default, implying that investors have private information about borrower quality that is unknown to the lead bank. Our findings suggest a new view of how information asymmetries affect syndicated lending.

Working papers are not edited, and all opinions and errors are the responsibility of the author(s). The views expressed do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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