Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments November 9, 2022 erstellt
Description:
The growing participation of institutional investors in the risky segment of corporate lending, which requires effective creditor monitoring poses a challenge to the conventional wisdom that banks’ retention of sufficiently large stakes in their originations is key to the provision of adequate monitoring incentives. We propose a new mechanism that provides an explanation behind the "monitoring with small stakes" puzzle and rationalizes the design of split control contracts in the leveraged loan market. We conceptualize two sources of incentive provision for creditors to conduct costly monitoring: skin in the game and rent extraction from renegotiation. As an alternative to skin in the game, the rent extraction-based mechanism plays a critical role in the provision of monitoring incentives and facilitating the participation of institutional investors in leveraged lending. We use the passage of a tax policy as a natural experiment that implies an exogenous reduction in renegotiation frictions to empirically identify the key channel of our theoretical framework. We find that a less frictional renegotiation environment leads to greater improvements in the performance of existing loans associated with the split control structure, and impacts the contractual features of newly issued loans that are arranged as split control deals relative to non-split control deals. Our analysis and findings provide important policy implications regarding the increasing participation of non-monitoring institutional investors in lending markets that require intensive creditors monitoring