Why Are Commercial Loan Rates So Sticky? The Effect of Private Information on Loan Spreads

54 Pages Posted: 16 May 2019 Last revised: 24 May 2021

See all articles by Cem Demiroglu

Cem Demiroglu

Koc University, College of Administrative Sciences and Economics

Christopher M. James

University of Florida - Department of Finance, Insurance and Real Estate

Guner Velioglu

Loyola University Chicago - Department of Finance

Date Written: May 17, 2021

Abstract

Past studies find that commercial loan spreads are "sticky" in the sense that they do not fully respond to changes in open market rates or observable firm credit risk characteristics. In this paper, we provide evidence that the appearance of stickiness arises, in part, because the intensity of bank screening varies inversely with changes in both observable firm credit risk characteristics and credit market conditions. Our analysis demonstrates that stickiness in loan spreads does not necessarily indicate loan mispricing or misallocation of credit.

Keywords: Loan Spreads, Relationship Lending, Private Information, Anchoring

JEL Classification: G21, G30, G32

Suggested Citation

Demiroglu, Cem and James, Christopher M. and Velioglu, Guner, Why Are Commercial Loan Rates So Sticky? The Effect of Private Information on Loan Spreads (May 17, 2021). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3384414 or http://dx.doi.org/10.2139/ssrn.3384414

Cem Demiroglu

Koc University, College of Administrative Sciences and Economics ( email )

Koc University
Sariyer
Istanbul, 34450
Turkey
90-212-338-1620 (Phone)
90-212-338-1653 (Fax)

HOME PAGE: http://https://sites.google.com/site/cemdemiroglu/

Christopher M. James

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-392-3486 (Phone)
352-392-0301 (Fax)

Guner Velioglu (Contact Author)

Loyola University Chicago - Department of Finance ( email )

820 North Michigan Avenue
Chicago, IL 60611
United States

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