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Why are commercial loan rates so sticky? The effect of private information on loan spreads

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  • Demiroglu, Cem
  • James, Christopher
  • Velioglu, Guner

Abstract

Past studies find that commercial loan spreads are “sticky” in the sense that they do not fully respond to changes in open market rates or observable firm credit risk characteristics. In this paper, we provide evidence that the appearance of stickiness arises, in part, because the intensity of bank screening varies inversely with changes in both observable firm credit risk characteristics and credit market conditions. Our analysis demonstrates that stickiness in loan spreads does not necessarily indicate loan mispricing or misallocation of credit.

Suggested Citation

  • Demiroglu, Cem & James, Christopher & Velioglu, Guner, 2022. "Why are commercial loan rates so sticky? The effect of private information on loan spreads," Journal of Financial Economics, Elsevier, vol. 143(2), pages 959-972.
    • Handle: RePEc:eee:jfinec:v:143:y:2022:i:2:p:959-972
    DOI: 10.1016/j.jfineco.2021.05.057
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    More about this item

    Keywords

    Loan spreads; Relationship lending; Private information; Anchoring;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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