60 Pages Posted: 26 May 2016 Last revised: 15 Jul 2017
Date Written: July 11, 2017
We explore the role of comparables in price formation. Using data on corporate loans, we exploit the lag between loans' closing dates and their inclusion in a widely-used comparables database to identify the causal effect of past transactions on new transaction pricing. We find that comparables pricing is an important determinant of individual loan spreads, but a failure to account for the overlap in information across loans leads to pricing mistakes. A comparable's influence grows with repeated use through its impact on intervening transactions. Moreover, market conditions prevailing at the time a comparable was priced also unduly influence subsequent loans.
Keywords: Comparables, Observational Learning, Herding, Credit Markets
JEL Classification: G20, G21, G10, G30
Suggested Citation: Suggested Citation