Private and public debt differ in information disclosure, which significantly affects borrower choice and loan decisions. Berlin and Loeys (1988), Berlin and Mester (1992), and Rajan and Winton (1995) find that the loan requests of highly risky borrowers (as perceived by potential lenders) get rejected in capital markets. Because of this, risky borrowers are forced to resort to private lenders with tighter controls. Transaction loans in capital markets are essentially the same as loans that are fully syndicated to many participating lenders (Dennis and Mullineaux 2000). Ahn and Choi (2009) note that the purpose of bank monitoring is to reduce a bank's credit risk by preventing moral hazard, which results from a borrower's opportunistic behavior. Consistent with the literature, banks form more concentrated syndicates when the incentive for and prospect of bank monitoring is high.
Lee and Mullineaux (2001) predict that, if the lead arranger tries to intensify bank monitoring by offering bigger shares of riskier loans to participating lenders, syndicate size should decline and syndicate concentration increase. This implies the lead arranger, having governance functions within the syndicate, also enhances incentives to monitor when the credit risk is significantly high.