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In this paper, the authors examine whether asymmetric information problems exist in the corporate loan market, and whether ownership of loans provides lenders the incentive to mitigate asymmetric information problems. The authors attempt to identify asymmetric information problems by testing the prediction of Leland and Pyle (1977), that loan ownership provides incentives for lenders to alleviate asymmetric information problems by engaging in ex-ante screening of borrowers' creditworthiness. The authors use a heteroskedastic regression to provide evidence of a statistically significant, positive association between several measures of loan ownership by lenders with responsibility for negotiating loan contract terms, and the quantity of non-publicly observable information incorporated into interest rate spreads on corporate loans, which the authors interpret as evidence of ex-ante screening.
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