Does investor diversity in loan syndications affect the initial returns in the secondary market?

Abstract: The syndicated loan market is a major source of corporate funding, raising $5 trillion in 2021. The secondary market where these loans are traded has seen a rapid growth in the last few decades. This growth was accompanied by the entrance of new types of participants, increasing the investor diversity. Similar to other markets, there is a price difference between the initial stage and the entrance in the open market. This under-pricing has been well researched in the IPO market but this research is yet to be done on these types of loans. This study investigates the impact of investor diversity on the discount. The relationship is expected to be negatively correlated, this hypothesis is reached though a theoretical argument, connecting investor diversity to market efficiency. The hypothesis was tested using historical data from the LPC DealScan database, using investor types and ownership concentration as proxies to diversity. This investigation showed statistically significant results, suggesting that the expected relationship exists. The results are robust even when controlling for fixed effects.