Anchoring on Credit Spreads
63 Pages Posted: 30 Dec 2010 Last revised: 9 May 2014
Date Written: May 8, 2014
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 ) to past deal terms is most plausible.
Keywords: Capital Structure, Cost of Debt, Anchoring, Reference Points
JEL Classification: G30, G32
Suggested Citation: Suggested Citation