Cultural Differences and the Structure of Loan Syndicates

Do cultural differences between lender and borrower affect the structure of the loan syndicate? Analyzing 8,031 syndicated loans to US borrowers signed between 1986 and 2007, we find that lending shares are higher for foreign than domestic arrangers. Among foreign arrangers, lending shares furthermore increase with cultural distance. We interpret this as the result of an increased moral hazard problem driven by higher information and effort costs faced by foreign arrangers. However, previous interactions between borrower and arranger can reduce moral hazard and hence even culturally distant arrangers are able to form diffused syndicates.