The “Dominant Bank Effect:” How High Lender Reputation Affects the Information Content and Terms of Bank Loans

Three large banks control over half of the U.S. commercial loan market by volume through the syndication process. Using attributes of a borrower’s location to instrument for lender– borrower matching, I show that the borrower stock price response to a loan announcement is more favorable if one of these dominant banks is the lender, especially if the borrower is “opaque.” I then show that these banks charge lower interest rates and are more likely to lend without the protection of a borrowing base. The results suggest that the dominant banks have a particularly high reputation for screening and monitoring borrowers.