Link About It: Information Asymmetry, Knowledge Pooling and Syndication in Project Finance Lending
by M. G. Contreras (Radboud University)
1701 - N1
In a market where information asymmetries dominate, a firm’s best strategy is often to pool resources from different firms in the form of an alliance with the purpose to mitigate such informational disadvantages. When firms form alliances, they may choose between firms with whom they have previously collaborated or new partner firms. Such a decision is influenced by the extent to which there is a need for new and complementary information since new partner firms possess non-redundant information and experience (Burt, 1992; Podolny, 1994; Ahuja, 2000; Baum et al., 2005; Li et al., 2008). But which market conditions lead firms to form alliances with new partners as opposed to previous partners? In particular, how do firms’ strategic alliance formation decisions change when the market they operate in suffers from large information asymmetries? Using the syndicated project finance loan market as an example, we discuss a firm strategy that has been partly overlooked by the literature, namely, that firms’ decisions to make new partnerships vis- à-vis resorting to previous partnerships depend on the information asymmetries present in the market. In particular, we find that banks are more likely to create new partnerships when information asymmetries are present in the market and when banks are directly affected by them; however, the rate at which the market becomes more opaque has a decreasing effect on the number of new partnerships formed.