We examine how banks use loan sales to manage liquidity during periods of marketwide stress and the associated spillovers to market prices. We track the dynamics of loan share ownership in the secondary market using data from a U.S. supervisory register of syndicated loans. Controlling for loan quality using loan-year fixed effects, we find that banks reliant on wholesale funding were more likely to exit syndicates through sales during 2007/08. This effect is stronger for banks dependent on short-term funding and holding fewer liquid securities. In addition, secondary market prices decrease significantly more for loans funded by liquidity-strained banks. Received November 16, 2015; editorial decision January 9, 2017 by Editor Itay Goldstein.

What is the economic role played by arrangers of leveraged loans, and what are the risks they face? We provide evidence that arrangers solve a demand discovery problem. Investors have incentives to feign little interest in the loan to obtain better terms. To deter such behavior, arrangers underprice hot deals and ration investors on cold deals. The risk associated with demand discovery is often shared between borrowers and arrangers. One implication is that to ration investors on cold deals, arrangers retain larger loan shares. This motive for retention is different from the monitoring incentive motive previously considered in the literature.