Skip to main content
SpringerLink
Log in

Small Firm Capital Structure and the Syndicated Loan Market

  • Published:
Journal of Financial Services Research Aims and scope Submit manuscript

Abstract

We show that small firms using syndicated loans for their mid- and long-term financial needs have significantly higher leverage than firms that do not borrow in this market. This difference cannot be attributed to firm characteristics like the availability of growth opportunities, asset tangibility, R&D spending, profitability and net sales that are known to influence capital structure. We also find that the capital structure of other firms that borrow in the syndicated loan market is not different from those that do not. We show that already highly leveraged small firms are more likely to borrow in the syndicated loan market than other firms. The higher debt in the capital structure of small firms that rely on syndicated loans consequently can be attributed to the availability of capital rather than demand for capital, as shown more generally by Faulkender and Petersen (Rev Financ Stud 19(1):45–79, 2006).

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. Faulkender and Petersen (2006) note that the minimum size of a bond issue was about $50 million during 1989–1992. They use market size of $290 million (50M/.172) as the cutoff point to proxy for firms with access to the bond market. The median market size of non-financial firms was around $83 million in 1990, according to Compustat. In this paper, we define small firms as those in the smallest book size quartile of firms using syndicated loans. The cutoff size for smallest quartile firm is $164 million in our sample. Our results do not change materially if we define small firms based on cutoff points anywhere between $83M and $290M.

  2. The syndication market involves elements of both commercial banking and investment banking (Dennis and Mullineaux 2000). Buyers of syndicated credits include investment banks, insurance companies, mutual funds, and other institutional fund managers (Dennis and Mullineaux 2000). Though Carey (1995) finds no significant difference between loan and bond spreads after adjusting for collateral and maturity, Ivashina (2005) notes that syndicated loans as a group, are cheaper than sole lender loans. Angbazo et al. (1998) investigate determinants of spreads on highly leveraged loans and find that syndicated loans have lower spreads. Dennis et al. (2000) find similar results for revolving loans. Their results are more pronounced for non-rated loans. Maskara (2010) finds that syndicated loans with multiple tranches have lower rates than non-tranched loans with similar characteristics.

  3. Banks loans that are not syndicated are significantly smaller than those that are. According to the Dealscan database, there were roughly equal number of banks loans and syndicated loans made during 1985–1999 but the dollar amount of syndicated loans dwarfed the bank loan amount by a large margin. The mean (median) size of loan was $69.8 million ($25 million) for single-bank loans and $322 million ($140 million) for syndicated loans.

  4. We perform our analysis using 1988–1991 period rather than 1985–1991 because the coverage of loans in Dealscan database is sparse prior to 1988. Our results stay the same when we use 1985–1991 period for our analysis.

  5. If we have the borrower’s ticker information for a loan deal, we consider that borrower to be a publicly traded company.

  6. Sufi (2006) finds that 85% of the firms in his random sample obtained lines of credit. Including short-term lines of credit in our sample will reduce the variation in our main variable and make our study uninformative.

  7. This makes it difficult for us to find support for our hypothesis. This type of selection error should misclassify loan-users as non-users. Additionally, despite the low match the number of debt issues that we are able to capture is in line with other studies. Moerman (2008) matches Compustat firms with Dealscan based on ticker symbol, borrower name, industry, and state for 1998–2003 period and report approximately 50% matching. We are able to match 45% of the firms for the 1988–1991 period based on manual matching of ticker symbol, name and industry.

  8. We also exclude those firms that have zero debt-to-assets ratio. However, the inclusion of such firms does not materially impact our results statistically or economically.

  9. The median difference is also 0.11 for the smallest quartile firms and is significant. The winsorized mean (at any conventional level) of the differences is also around 0.11. We also test our results using market leverage rather than book leverage and find that our results are robust to this change. Our results are robust to an alternative measure of debt that excludes preferred stock and accounts payable.

  10. Our results remain the same if we replace the missing values of R&D with zeroes on the grounds that they are not reported because they are non-existent.

  11. Our specification assumes that the decision to syndicate is exogenous with respect to the leverage decision. The decision to borrow via a syndicated loan versus a relationship loan is presumably endogenous, however. In the next section, we specify and estimate a hazard model that allows us to estimate the probability a borrower will make each of these decisions.

  12. We use a hazard model in our study because our analysis resembles the survival/failure time analysis of biological and medical studies. In our study, we have treated a firm as a syndicated loan-using firm if it has taken at least one syndicated loan during our study period. As soon as a firm takes a syndicated loan, its category changes from a ‘non-user’ to a ‘user’. We are examining whether, all else equal, highly-leveraged small firms are more likely to change from non-users to users of syndicated loans. Hazard models are suitable for such an examination. Leary and Roberts (2005) use a hazard model in a similar context, with a focus on how firms rebalance their capital structures.

  13. We have already shown in the earlier section that firms that used syndicated loans prior to 1991 were not significantly different from other firms in any of the firm characteristics that impact a firm’s demand for debt.

  14. The average D/A of first time borrowers of syndicated loans in our hazard model increased to 0.559 after the loan from .516 the year prior. This increase in the leverage was statistically significant at 1% level. This suggests that syndicated loans do not just replace existing debt of firms with high leverage rather they provide new source of funds.

References

  • Angbazo L, Mei J, Saunders A (1998) Credit spreads in the market for highly leveraged loans. J Bank Finance 22:1249–1282

    Article  Google Scholar 

  • Armstrong J (2003) The syndicated loan market: developments in the North American context. Bank of Canada working paper series

  • Baker M, Wurgler J (2002) Market timing and capital structure. J Finance 52(1):1–32

    Article  Google Scholar 

  • Bhattacharya S, Chiesa G (1995) Proprietary information, financial intermediation, and research incentives. J Financ Intermed 4:328–357

    Article  Google Scholar 

  • Bolton P, Scharfstein DS (1996) Optimal debt structure and the number of creditors. J Polit Econ 104(1):1–25

    Article  Google Scholar 

  • Bolton P, Ferixas X (2000) Equity, bonds and bank debt: capital structure and financial market equilibrium under asymmetric information. J Polit Econ 108(2):324–351

    Article  Google Scholar 

  • Buch CM (2002) Are banks different? Evidence from international data. Int Finance 5(1):97–114

    Article  Google Scholar 

  • Carey M (1995) Are bank loans mispriced? Working Paper. Washington D.C.: Board of Governers of the Federal Reserve System

  • Dages G, Goldberg L, Kinney D (2000) Foreign and domestic bank participation in emerging markets: lessons from Mexico and Argentina. FRBNY Economic Policy Review, September 2002

  • Denis JD, Mihov VT (2003) The choice among bank debt, non-bank private debt, and public debt: evidence from new corporate borrowings. J Financ Econ 70:3–28

    Article  Google Scholar 

  • Dennis SA, Mullineaux DJ (2000) Syndicated loans. J Financ Intermed 9:404–426

    Article  Google Scholar 

  • Dennis SA, Nandy D, Sharpe IG (2000) The determinants of contract terms in bank revolving credit agreements. J Financ Quant Anal 35:87–110

    Article  Google Scholar 

  • Diamond DW (1991) Monitoring and reputation: the choice between bank loans and directly placed debt. J Polit Econ 99(4):689–721

    Article  Google Scholar 

  • Eichengreen B, Mody A (2000) Lending booms, reserves and the sustainability of short-term debt: inferences from the pricing of syndicated bank loans. J Dev Econ 63:5–44

    Article  Google Scholar 

  • Eichengreen B, Luengnaruemitchai P (2004) Why doesn’t Asia have bigger bond markets? NBER working paper

  • Esty BC, Megginson WL (2003) Creditor rights, enforcement, and debt ownership structure: evidence from the global syndicated loan market. J Financ Quant Anal 38(1):37–59

    Article  Google Scholar 

  • Faulkender M, Petersen M (2006) Does the source of capital affect capital structure? Rev Financ Stud 19(1):45–79

    Article  Google Scholar 

  • Graham JR (2000) How big are the tax benefits of debt? J Finance 55(5):1901–1941

    Article  Google Scholar 

  • Hadlock CJ, James CM (2002) Do banks provide financial slack? J Finance 57(3):1383–1419

    Article  Google Scholar 

  • Hull L, Tesar LL (2001) The structure of international capital flows. In: Siebert H (ed) The world’s new financial landscape: challenges for economic policy. Michigan University Press, Michigan, pp 87–109

    Google Scholar 

  • Ivashina V (2005) Structure and pricing of syndicated loans. The New York City Area Conference on Financial Intermediation

  • Jones J, Lang WW, Nigro P (2005) Recent trend in bank loan syndications: evidence for 1995 to 1999. J Financ Res 28:385–402

    Article  Google Scholar 

  • Lamont OA, Polk C (2002) Does diversification destroy value? Evidence from the industry shocks? J Financ Econ 63:51–77

    Article  Google Scholar 

  • Leary MT, Roberts MR (2005) Do firms rebalance their capital structures. J Finance 60(6):2575–2619

    Article  Google Scholar 

  • Maskara PK (2006) Participation of investment banks and non-bank financial institutions in syndicated loans. http://ssrn.com/abstract=93071

  • Maskara PK (2010) Economic value in tranching of syndicated loans. J Bank Financ 34(5):946–955

    Google Scholar 

  • Moerman RW (2008) The impact of information asymmetry on debt pricing and maturity. University of Chicago, working paper available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1135324

  • Pulvino TC (1998) Do asset fire sales exist? An empirical investigation of commercial aircraft transactions. J Finance 53(3):939–978

    Article  Google Scholar 

  • Rajan RG, Zingales L (1995) What do we know about capital structure: some evidence from international data? J Finance 50(5):1421–1460

    Article  Google Scholar 

  • Sufi A (2006) Agency and renegotiation in corporate finance: evidence from syndicated loans. Working paper

  • Thomas H, Wang Z (2004) The integration of bank syndicated loan and junk bond markets. J Bank Finance 28:299–329

    Google Scholar 

  • Weidner D (2000) Syndicated loans gaining leverage on junk bonds. American Banker, February 11, 2000

  • Yosha O (1995) Information disclosure costs and the choice of financing source. J Financ Intermed 4:3–20

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Eastern Kentucky University, Richmond, KY, USA

    Pankaj Kumar Maskara

  2. University of Kentucky, Lexington, KY, USA

    Donald J. Mullineaux

Authors
  1. Pankaj Kumar Maskara
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Donald J. Mullineaux
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Donald J. Mullineaux.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Maskara, P.K., Mullineaux, D.J. Small Firm Capital Structure and the Syndicated Loan Market. J Financ Serv Res 39, 55–70 (2011). https://doi.org/10.1007/s10693-010-0086-3

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10693-010-0086-3

Keywords

JEL classifications

Search

Navigation