Debt Structure and Loan Sales

I find that a more concentrated debt structure increases the likelihood of newly issued loans being sold in the secondary market. A one-standard-deviation increase in the Herfindahl-Hirschman Index of the seven debt types prior to loan issuance is associated with a 7% higher likelihood of a new loan being sold relative to the sample average. A more concentrated debt structure enhances coordination and bargaining power among existing creditors, which discourages the participation of new lenders and weakens their bargaining position. Consequently, new entrants tend to prefer more tradable loan structures and rely on active secondary markets to mitigate these constraints. This effect is less pronounced for loans involving relationship lenders or those structured as credit lines, which can mitigate conflicts between existing and prospective creditors. By contrast, the effect is more pronounced for firms with a higher proportion of secured debt, as the presence of collateral strengthens incumbent lenders’ incentives to monitor borrowers and enforce their claims in the event of default. Moreover, the effect is amplified among financially distressed firms, where disputes over asset distribution are more likely to occur. These results underscore the critical role of a borrower’s existing debt st structure in shaping investor behavior.