Going by the literature, loan collateral can have a positive or a negative impact on the prospects for loan syndication. Bester (1985) and Besanko and Thakor (1987) show that the level of loan collateral signals a borrower's credit worthiness. The efforts made by a lender to monitor a borrower's earnings and cash flow assumes less importance when a loan is fully secured. Accordingly, loan collateral significantly reduces the associated problems of information asymmetry between lenders and borrowers, suggesting that loan security increases the likelihood for loan syndication.
Berger and Udell (1990), however, find a significant association between collateral and riskier loans. They find evidence that, when these are compared, secured loans have a higher default risk than unsecured loans. So, in the event of financial distress, lead arrangers are highly motivated to strengthen monitoring and to improve the chances of successful loan restructuring by forming more concentrated loan syndicates. Rajan and Winton (1995) show the positive relationship between collateral and a lender's monitoring incentive because of potential agency problems. If loan security aims to resolve information asymmetry (that is, moral hazard problems), then riskier borrowers who require intense monitoring will put up more collateral. In this case, forming a large loan syndicate is inefficient because it "dilutes" each lender's monitoring incentive, suggesting the presence of collateral lowers the prospects for syndicating a loan (Dennis and Mullineaux 2000; Lee and Mullineaux 2001).