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Negotiation and the clustering of corporate loan spreads

Author

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  • Chaudhry S.M.
  • Kleimeier S.

    (GSBE)

Abstract

Most corporate loans are priced at rounded spreads, e.g. spreads that are a multiple of 25 basis points. Using a sample of 16,598 loan tranches signed by US borrowers between January 1988 and December 2010, this study explores the determinants of such interest rate clustering in the corporate syndicated loan market. We postulate that lead arrangers round spreads upwards because of the uncertainty about the riskiness of the borrowers. Consistent with this negotiation hypothesis, we find that clustering increases with the degree of uncertainty, e.g. the degree of information asymmetry between the lead arranger and the borrower. In contrast, clustering is less likely when lead arrangers have acquired information about the borrower through prior interactions. Finally, the fear of reputation loss incentivizes the most reputable lead arrangers to price loans at more competitive non-rounded spreads.

Suggested Citation

  • Chaudhry S.M. & Kleimeier S., 2013. "Negotiation and the clustering of corporate loan spreads," Research Memorandum 012, Maastricht University, Graduate School of Business and Economics (GSBE).
  • Handle: RePEc:unm:umagsb:2013012
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    File URL: https://cris.maastrichtuniversity.nl/portal/files/1356942/content
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    References listed on IDEAS

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    More about this item

    Keywords

    Market Structure and Pricing: Other; Asymmetric and Private Information; Mechanism Design; Asset Pricing; Trading volume; Bond Interest Rates; Banks; Depository Institutions; Micro Finance Institutions; Mortgages;

    JEL classification:

    • D49 - Microeconomics - - Market Structure, Pricing, and Design - - - Other
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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