Abstract

We investigate how partisanship influences interactions between politically divergent banks in the syndicated loan market. The idea is that banks with divergent political values differ in their perceptions of credit risk, where greater differences in partisan beliefs between banks increase coordination costs by impeding consensus. We find that as the political distance between a lead arranger and a participant bank increases, the difference in loan shares held by the lead and a participant bank increases. Consistent with differential partisan perceptions, the relation between political distance and differences in lead and participant loan shares is stronger following the 2016 presidential election and when political polarization of economic views is higher. Greater political diversity across syndicate members is associated with less restrictive loan covenants and higher interest spreads. These results are consistent with politically diverse syndicates lowering coordination costs by limiting loan renegotiations, while compensating for reduced covenant protection with higher spreads.

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• Keyword(s):
• accounting 121

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