Syndicated Lending, Competition, and Relative Performance Evaluation

Abstract

Relative performance evaluation (RPE) intensifies competitive pressure by tying executive compensation to the profits of rivals. We show that these contracts make loan syndication harder by reducing banks’ willingness to participate in loans underwritten by banks named in their RPE contracts. Lead arranger banks, which are more frequently named in RPE, hold larger shares of the loans they syndicate, and their borrowers receive smaller and fewer loans and face higher spreads. Our results highlight the tension between the normal benefits of competition versus the need for cooperation in loan syndication.