The Informational Role of the Media in Private Lending

• Published date: 01 March 2017
• Date: 01 March 2017
• DOI: http://doi.org/10.1111/1475-679X.12131

DOI: 10.1111/1475-679X.12131

Journal of Accounting Research

Vol. 55 No. 1 March 2017

Printed in U.S.A.

The Informational Role of the

Media in Private Lending

ROBERT M. BUSHMAN,

∗CHRISTOPHER D. WILLIAMS,

†

AND REGINA WITTENBERG-MOERMAN

‡

Received 4 January 2014; accepted 20 June 2016

ABSTRACT

We investigate whether a borrower’s media coverage influences the syndi-

cated loan origination and participation decisions of informationally disad-

vantaged lenders, loan syndicate structures, and interest spreads. In syndi-

cated loan deals, information asymmetries can exist between lenders that

have a relationship with a borrower and less informed, nonrelationship

lenders competing to serve as lead arranger on a syndicated loan, and also

between lead arrangers and less informed syndicate participants. Theory

∗Kenan-Flagler Business School, University of North Carolina–Chapel Hill; †Ross School

of Business, University of Michigan; ‡Marshall School of Business, The University of Southern

California.

Accepted by Douglas Skinner. We appreciate the helpful comments of three anonymous

reviewers, Robert Bloomfield, Doug Diamond, Yiwei Dow, Matthew Gentzkow, Wayne Guay

(discussant), Christian Leuz, Amir Sufi, and participants at the George Washington Univer-

sity Cherry Blossom Accounting Conference, the Yale Fall 2013 conference, the Utah Winter

Accounting Conference, and seminar participants at Carnegie Mellon University, Columbia

University, Cornell University, LBS, Pennsylvania State University, the University of Graz,

the University of Iowa, the University of Washington at Seattle, and the Vienna Graduate

School of Finance. We are very grateful to Vincent Pham for excellent research assistance.

We thank the Thomson Reuters Loan Pricing Corporation for providing loan data. We thank

RavenPack for providing media data and Malcolm Bain for many helpful discussions. We

are grateful to Bryan Kelly for sharing data on analyst coverage reductions. We gratefully

acknowledge the financial support of the Kenan-Flagler Business School, the University of

North Carolina at Chapel Hill, the Ross School of Business, University of Michigan, the

University of Chicago Booth School of Business, and the University of Southern Califor-

nia, Marshall School of Business. An online appendix to this paper can be downloaded at

http://research.chicagobooth.edu/arc/journal-of-accounting-research/online-supplements.

115

Copyright C, University of Chicago on behalf of the Accounting Research Center,2016

116 R.M.BUSHMAN,C.D.WILLIAMS,AND R.WITTENBERG-MOERMAN

suggests that the aggressiveness with which less informed lenders compete

for a loan deal increases in the sentiment of public information signals about

a borrower. We extend this theory to syndicated loans and hypothesize that

the likelihood of less informed lenders serving as the lead arranger or joining

a loan syndicate is increasing in the sentiment of media-initiated, borrower-

specific articles published prior to loan origination. We find that as media

sentiment increases (1) outside, nonrelationship lenders have a higher prob-

ability of originating loans; (2) syndicate participants are less likely to have a

previous relationship with the borrower or lead bank; (3) lead banks retain a

lower percentage of loans; and (4) loan spreads decrease.

JEL codes: G12; G21; M40; M41

Keywords: media; relationship lending; syndicate structure; lead arranger;

sentiment

1. Introduction

The business press is an important source of public information about a

firm. There is substantial evidence that the business press provides infor-

mation about firms’ fundamentals to equity market participants incremen-

tal to that provided by other information intermediaries and by accounting

data (e.g., Tetlock, Saar-Tsechansky, and Macskassy [2008]), and that it re-

duces information asymmetries between equity investors (e.g., Bushee et al.

[2010]). However, there is little research examining the role played by the

media in private lending markets. In this paper, we investigate the extent

to which media coverage of borrowers influences the loan origination and

participation decisions of informationally disadvantaged lenders, loan syn-

dicate structures, and interest rate spreads.

A defining feature of equity markets is that investors do not generally

have privileged access to firms’ confidential information, as securities law

prohibits unequal access to such information. This creates scope for the

media to serve as an information intermediary for equity investors seeking

information from sources external to the firm.1In contrast, private debt

markets are not subject to securities laws, allowing lenders significant access

to borrowers’ private information as an integral part of the lending process.

Syndicated loans involve multiple lenders where the degree of access to

borrowers’ inside information can differ substantially across lenders. Such

differential access to information creates information asymmetries between

lenders at two levels.

First, syndicated lending involves information asymmetry between inside

lenders with a prior relationship with a borrower and outside, nonrelation-

ship lenders competing for a mandate to serve as the lead arranger on a

1Bushee et al. [2010] define an information intermediary as an agent that provides infor-

mation that is new and useful to other parties because it has either not been publicly released

or widely disseminated.

THE INFORMATIONAL ROLE OF THE MEDIA IN PRIVATE LENDING 117

borrower’s loan.2Nonrelationship lenders are typically at an information

disadvantage relative to relationship lenders. Through sustained engage-

ment, relationship lead banks gain extensive inside knowledge of a bor-

rower’s operations and develop private channels of communication with

its managers. Borrowers are also inclined to reveal sensitive private infor-

mation to relationship lenders (e.g., Greenbaum and Thakor [1995], Boot

[2000], Bharath et al. [2009]).3Second, information asymmetries exist be-

tween lead banks and other syndicate participants (we use the terms lead ar-

ranger and lead bank interchangeably). Although participants can receive

some private information from the lead bank or borrower, they are gener-

ally at an information disadvantage relative to the lead bank because they

tend to maintain an arm’s length relationship with the borrower, while the

lead bank has the primary due diligence and monitoring responsibilities

(e.g., Lee and Mullineaux [2004], Sufi [2007], Ivashina [2009]).

Outside lenders, analogous to equity investors, have incentives to seek

credit-relevant information about a borrower to mitigate their information

disadvantage relative to more informed inside lenders.4While media is un-

likely to fully remove an inside lender’s private information advantage, it

can reduce relative information asymmetries across lenders and influence

loan syndicate formation and pricing by transmitting credit-relevant in-

formation to less informed lenders that is incremental to information re-

ceived from other sources. We investigate the informational role of the

media in syndicated lending by employing a quantitative measure of me-

dia sentiment in business press articles about a borrower. Using data from

RavenPack News Analytics, we construct a measure that reflects the aver-

age sentiment across all full-size borrower-specific articles published over

the six-month period preceding loan origination (Media Sentiment). Raven-

Pack’s sentiment score reflects assessments of the tone of the news in a

given article (i.e., positive or negative news), as well as the strength of the

news the article contains.

We first investigate if the media influences competition between inside

and outside lenders for the mandate to serve as the lead arranger on a bor-

rower’s loan. This analysis builds on the model from Rajan [1992] in which

2A lead arranger establishes a relationship with the borrower and has primary responsibility

for information collection, ex ante due diligence, distributing shares of the loan to syndicate

participants and ex post monitoring, among other duties. The lead arranger receives a fee for

arranging and managing the syndicated loan. We discuss institutional aspects of syndicated

lending in more detail in section 2.1.

3The idea that inside banks have an information advantage is well established in the litera-

ture (e.g., Kane and Malkiel [1965], Fama [1985], Greenbaum, Kanatas, and Venezia [1989],

Sharpe [1990], Rajan [1992], Petersen and Rajan [1994, 1995], Dell’Ariccia and Marquez

[2004]).

4For parsimony, we often refer to lead arrangers with a relationship to a borrower and

participant banks with a relationship to the lead arranger or a borrower as inside lenders, and

other lenders as outside lenders. The premise is that inside lenders are better informed than

are outside lenders.