Foreign Institutional Ownership and Cross-Border Lending: Evidence from International Syndicated Loans

Abstract

Foreign banks often shy away from domestic firms due to high information asymmetry and costly monitoring. We hypothesize that foreign institutional shareholders could help domestic firms access foreign debt by playing information and monitoring roles. Information sharing between foreign institutions and foreign banks reduces the information asymmetry. Monitoring by foreign institutional shareholders could alleviate foreign banks’ concerns for borrower moral hazard. Using a sample of international syndicated loans, we find that borrowers’ foreign institutional ownership is positively associated with the participation of foreign banks in loan syndicates. These results are stronger among borrowers with more opaque information environment. We also find that foreign loans rely more on lender monitoring mechanisms when the borrower has higher foreign institutional ownership. Furthermore, borrowers are more likely to borrow from lenders located in the same country as their foreign institutional shareholders. These findings provide support for the information role of borrowers’ foreign institutional shareholders. The evidence on the monitoring role of foreign institutional shareholders is mixed. Lastly, we find that foreign institutional shareholders also help borrowers access foreign debt at a lower price. Overall, our results highlight a distinct information role played by foreign institutional shareholders in global debt markets.

Keywords: Syndicated Loans, Foreign Institutional Ownership, Cross-Border Lending, Information, Monitoring

JEL Classification: G23, G32