1. Financial institution network and the certification value of bank loans Christophe J. Godlewski UHA & EM Strasbourg Bulat Sanditov Telecom EM AFFI Conference 2015, Cergy-Pontoise

2. Take away 2 Financial institutions network and reputation Certification value of bank loans European syndicated loans (2001-11) Social network analysis + event study methodologies Presence of central and reputable lenders increase borrower’s stock market reaction to a loan announcement Stronger effect when informational frictions are important Effect vanishes away during severe distruption in the functioning of financial markets

3. Background & motivations 3 Banks produce private information on borrowers (Diamond 1984…) Bank loans bear a certification value => AR > 0 for borrower’s stock around the date of bank loan announcement (James 1987…) Maintaining reputation for diligent screening & monitoring => mitigate informational frictions & agency problems Syndicated loans market (4.7 trln $, 2014): lead bank reputation is crucial (Ross 2010…) Lead bank = structure deal, negotiate loan terms, organize syndicate Reputable leader => enhance monitoring, attract participants, signal quality, reduce agency costs…

4. Background & motivations (cont.) 4 Lender reputation  trust & reciprocity = critical forms of social capital (Song 2009) driven by social networks (Cagno & Sciubba 2010) Social network features of syndicated lending market = information & capital networks (Baum et al. 2003, 2004) Repeated interactions => trust & reciprocity => solve informational frictions => mitigate agency problems => important for firms seeking external financing (Brander et al. 202, Wang & Wang 2012) => affect pricing and structure of bank loan agreements (Cai 2009, Godlewski et al. 2012, Gatti et al. 2013)

5. Aim & contributions 5 Do banks’ network/reputation affect certification value of bank loans? 1.Impact of bank network/reputation on certification value of bank loan => borrower AR / event study methodology 2.Social network metrics (Centrality centrality) to proxy reputation => richer / comprehensive measure 3.European focus => bank private debt = main source of external financing for companies

6. Empirical design | Data 6 Loan and syndicate characteristics : Bloomberg Amount, spread, maturity, announcement date… Number of lenders, roles (titles)… Borrower characteristics : Factset Balance sheet & stock market information Country characteristics : GFDD (WB) + Djankov et al. (2007) European non-financial companies (24 countries) January 2001 – June 2011 254 companies / 465 loans / 906 lenders

7. Empirical design | SNA methodology 7 Network = collection of nodes & links Banks’ participation in syndicated loans = affiliation network => bipartite network with 2 types of nodes = actors (banks) linked with events (deals) Projection of bipartite network => links between lead and participant banks => overlapping moving 3 years windows (Baum et al. 2003…) 3 classifications of leaders: Mandated arranger or Lead arranger (1) + Lead manager, Book runner, Book manager… (2) + Co / Joint, Managers… (3)

8. Empirical design | SNA methodology (cont.) 8 (a) (b) 12345678910 A B C Lenders Loans 11 D 1 2 3 4 5 6 7 8 9 10 11

9. Empirical design | SNA methodology (cont.) 9 Leaders social network metrics => focus on Centrality centrality => how well leader is positioned within a network => control over the flow of information/capital => interaction, reciprocity, trust => social capital => proxy of reputation Formally = number of the shortest paths between all pairs of lenders in a network, which pass through a lender, deflated by the number of alternative shortest paths Compute average, median and interquartile of Centrality centrality by syndicate => 3 measures of centrality + 3 classifications of leaders = 9 measures of network/reputation

10. Empirical design | Event study methodology 10

11. Results | (some) Descriptive statistics 11 Loans Syndicate centrality

12. Results | (more) Descriptive statistics 12 VariableMeanSDMedian Y = CAR (-1,1)0.05440.0776-0.0035 avg. Centrality (1)0.01850.01330.0173 med. Centrality (1)0.01000.01440.0046 iqr. Centrality (1)0.02240.01810.0208 Loan amount (mln $)1300.00001900.0000729.0000 Maturity (y)5.52363.39885.0000 Term loan0.51250.49991.0000 Secured0.20220.40170.0000 Covenants0.16390.37020.0000 Syndicate (n)19.473723.046613.0000 Tranches (n)2.24842.49712.0000 League table0.48650.49990.0000 First loan0.58990.49191.0000 Loan variables Centrality variables

13. Results | (more) Descriptive statistics 13 VariableMeanSDMedian Rating0.32870.46980.0000 Sales (mln $)12200.000024400.00005440.0000 Debt ratio0.32250.17410.3240 Ebitda margin-1.560094.29420.1140 Stock market0.92890.42730.8945 Private credit1.34700.45571.2992 French law0.52970.49921.0000 German law0.14050.34750.0000 Creditor rights2.13231.36582.0000 Bank Z score14.50106.643013.8325 Bank concentration0.68060.16650.6558 Crisis0.20220.40170.0000 Country variables Borrower variables

14. Results | Main regression results 14 Variableavg. Centralitymed. Centralityiqr. Centrality 123456789 Baseline results (loan & syndicate var.) Centrality2.05452.10962.44732.34712.72502.72590.3337-0.0505-0.6432 With firm characteristics Centrality1.04090.88470.87880.41680.38270.21900.29020.39670.3133 With country characteristics Centrality2.80432.25392.53842.59482.41332.58240.9349-0.4434-0.8280 OLS regressions, Y = CAR(-1,1), robust s.e. clustered at loan level Controls = loan currency, purpose, year; borrower industry, country Bold coef. = significant at 10% min. (*)

15. Results | Interaction terms 15 Variable Small loan Short maturity SecuredCovenants Small syndicate League table avg Centrality (1)0.62442.17052.06293.8361-3.95063.5214 avg. Centrality (1) x Variable 2.2794-0.4267-0.0232-9.86436.5792-3.6920 Variable Low sales Low debt Low profit avg Centrality (1)-0.29160.43101.0274 avg. Centrality (1) x Variable 1.80761.05510.0530 Variable Low stock market Low private credit Low bank z score High bank concentration Weak creditor rights Crisis avg Centrality (1)2.09324.557510.07463.38540.73503.2628 avg. Centrality (1) x Variable 1.9213-3.4674-12.8608-2.01845.1910-4.3345 Ibid. Interaction variable = dummy (use of sample median for cont. Variables)

16. Conclusion 16 Syndicate centrality / reputation matter for certification value of bank loans in Europe Presence of central / reputable leaders increase stock market reaction (AR) to a loan announcement Impact on AR reinforced when informational frictions are important but effect vanishes away during financial crisis of 2008 Contribution to recent literature on the role of reputation and networks in financial intermediation Important for the development of credit markets, especially in Europe Limits = potential endogeneity in matching of borrowers and lenders