Anchoring on Credit Spreads

63 Pages Posted: 30 Dec 2010 Last revised: 9 May 2014

See all articles by Casey Dougal

Casey Dougal

Florida State University

Joseph Engelberg

University of California, San Diego (UCSD) - Rady School of Management

Christopher A. Parsons

Marshall School of Business, University of Southern California

Edward Dickersin Van Wesep

University of Colorado at Boulder - Department of Finance

Date Written: May 8, 2014

Abstract

This paper documents that the path of credit spreads since a firm's last loan influences the level at which it can currently borrow. If spreads have moved in the firm's favor (i.e., declined), it is charged a higher interest rate than justified by current fundamentals, and if spreads have moved to its detriment, it is charged a lower rate. We evaluate several possible explanations for this finding, and conclude that anchoring (Tversky and Kahneman [1974]) to past deal terms is most plausible.

Keywords: Capital Structure, Cost of Debt, Anchoring, Reference Points

JEL Classification: G30, G32

Suggested Citation

Dougal, Casey and Engelberg, Joseph and Parsons, Christopher A. and Van Wesep, Edward Dickersin, Anchoring on Credit Spreads (May 8, 2014). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1732559 or http://dx.doi.org/10.2139/ssrn.1732559

Casey Dougal

Florida State University ( email )

Tallahasse, FL 32306
United States

Joseph Engelberg (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Christopher A. Parsons

Marshall School of Business, University of Southern California ( email )

3670 Trousdale Pkwy
Los Angeles, CA 90089
United States

Edward Dickersin Van Wesep

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States

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