MONITORING, LOAN RENEGOTIABILITY, AND FIRM VALUE - THE ROLE OF LENDING SYNDICATES

The positive response in capital markets to announcements of private f inancings is well documented and typically rationalized as a reflectio n of valuable monitoring and screening services provided by banks and other private lenders. This paper investigates the hypothesis that the capacity to renegotiate private debt contracts relatively inexpensive ly complements monitoring as a source of value to borrowers. The conte xt for our study is lending by syndicates of private lenders. As the n umber of lenders increases, contracting costs increase and the value a ssociated with the capacity to renegotiate should decline. Our evidenc e supports this hypothesis. We conduct additional tests to determine w hether our results are robust to alternative interpretations, such as information leakage or the prospect that syndicate size proxies for in formation-related variables. Syndicate size remains related to the sca le of the market's reaction, after taking various borrower and loan ch aracteristics into account.