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Loan spreads and credit cycles: The role of lenders’ personal economic experiences

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  • Carvalho, Daniel
  • Gao, Janet
  • Ma, Pengfei

Abstract

We provide evidence that changes in lender optimism can lead to excessive fluctuations in credit spreads across the credit cycle. Using data on the real estate properties of loan officers originating large corporate loans, we find that credit spreads overreact to sophisticated lenders’ recent local economic experiences, captured by local housing price growth. These effects are only present when borrowers own real estate assets and during times of greater uncertainty about real estate values, i.e., boom-and-bust cycles in housing prices. Our analysis suggests that recent personal experiences shape sophisticated lenders’ beliefs about real estate values, which affect their pricing decisions.

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  • Carvalho, Daniel & Gao, Janet & Ma, Pengfei, 2023. "Loan spreads and credit cycles: The role of lenders’ personal economic experiences," Journal of Financial Economics, Elsevier, vol. 148(2), pages 118-149.
    • Handle: RePEc:eee:jfinec:v:148:y:2023:i:2:p:118-149
    DOI: 10.1016/j.jfineco.2023.02.003
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    Cited by:

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    2. Wang, Congcong & Wang, Chong & Long, Huaigang & Zaremba, Adam & Zhou, Wenyu, 2024. "Green bond credit spreads and bank loans in China," International Review of Financial Analysis, Elsevier, vol. 94(C).

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    More about this item

    Keywords

    Personal experiences; Credit cycle; Loan officers; Lender optimism; Sophisticated investors; Real estate prices;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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