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RFS Advance Access first published online on January 19, 2006
This version published online on January 24, 2006
Review of Financial Studies, doi:10.1093/rfs/hhj017
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© The Author 2006. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org

Article

Loan Sales and the Cost of Corporate Borrowing

A. Burak Güner 1 *
1 Barclays Global Investors, San Francisco

* To whom correspondence should be addressed.
A. Burak Güner, E-mail: burak{at}alum.mit.edu


  Abstract

When a loan is sold, it goes to a lower-cost financing source than its originator. Yet, lending markets are less than perfectly competitive. Despite the lower funding cost, therefore, the loan price is not necessarily more favorable to the borrower. However, corporate borrowers are averse to the participation of their loans to other lenders due to the complexity of dealing with multiple banks and the potential information costs of the sale announcement. Consequently, I conjecture that the borrower extracts a price concession in exchange for allowing the bank to sell participations in the loan. Using a hand-matched dataset of loans, borrowers, and lenders, I find that the average yield spread on loans originated by active loan sellers is about 20 basis points lower than the average spread on loans originated by moderate loan sellers.

Figures are included.
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