Loan Spreads and Credit Cycles: The Role of Lenders' Personal Economic Experiences

66 Pages Posted: 24 Jun 2019 Last revised: 17 Dec 2022

See all articles by Daniel R. Carvalho

Daniel R. Carvalho

Indiana University - Kelley School of Business

Janet Gao

McDonough School of Business

Pengfei Ma

Indiana University - Kelley School of Business

Date Written: December 16, 2022

Abstract

We provide evidence that changes in lender optimism can lead to excessive fluctuations in credit spreads across the credit cycle. Using data on the real estate properties of loan officers originating large corporate loans, we find that credit spreads overreact to sophisticated lenders’ recent local economic experiences, captured by local housing price growth. These effects are only present when borrowers own real estate assets and during times of greater uncertainty about real estate values, i.e., boom-and-bust cycles in housing prices. Our analysis suggests that recent personal experiences shape sophisticated lenders’ beliefs about real estate values, which affect their pricing decisions.

Keywords: Credit Spreads, Credit Cycles, Lender Optimism, Personal Experiences

JEL Classification: G20, G02, G21

Suggested Citation

Carvalho, Daniel R. and Gao, Janet and Ma, Pengfei, Loan Spreads and Credit Cycles: The Role of Lenders' Personal Economic Experiences (December 16, 2022). Kelley School of Business Research Paper No. 19-30, Available at SSRN: https://ssrn.com/abstract=3404368 or http://dx.doi.org/10.2139/ssrn.3404368

Daniel R. Carvalho (Contact Author)

Indiana University - Kelley School of Business ( email )

Bloomington, IN 47405
United States

Janet Gao

McDonough School of Business ( email )

Washington, DC 20057
United States

Pengfei Ma

Indiana University - Kelley School of Business ( email )

Bloomington, IN 47405
United States

HOME PAGE: http://sites.google.com/view/pengfei

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
647
Abstract Views
7,632
Rank
62,415
PlumX Metrics