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

52 Pages Posted: 16 May 2019 Last revised: 11 Jun 2019

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 7, 2019

Abstract

Past studies find that commercial loan spreads are “sticky,” in the sense that they do not fully respond to changes in market rates or observable firm credit risk characteristics. In this paper, we provide evidence that stickiness arises, in part, because the intensity of bank screening based on private soft information varies with changes in credit market conditions and observable firm credit risk characteristics. Our analysis demonstrates that stickiness in loan spreads does not necessarily indicate loan mispricing and may arise even in the absence of credit rationing, bank information monopolies, or behavioral biases in loan contracting.

Keywords: bank lending, loan pricing, private information

JEL Classification: G21, 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 7, 2019). 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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