Syndicated Lending Relationships, Information Asymmetry, and Market Making in the Secondary Loan Market

Abstract

This paper investigates why commercial lenders make markets for the loansthat they sell on the secondary market. Using loan-level data, I find thatorigination lenders with extensive borrower relationships and more repu-tational capital at stake are more likely to serve as market makers. Greaterparticipation of origination lenders as market makers is associated with lowertrading costs for their borrowers’ loans. This association remains even in con-ditions where origination lenders could exploit their information advantagefor market making profits. Lenders benefit from being market makers bymaintaining strong subsequent lending relationships with their borrowers.Collectively, this evidence is consistent with origination lenders’ participationin the secondary market being motivated by reducing trading frictions ratherthan market making profits.