Forward Guidance and Corporate Lending

70 Pages Posted: 9 Feb 2020 Last revised: 8 Oct 2021

See all articles by Manthos D. Delis

Manthos D. Delis

Montpellier Business School

Sizhe Hong

Durham University Business School

Nikos Paltalidis

Durham University Business School

Dennis Philip

Durham University - Department of Economics and Finance

Date Written: September 1, 2021

Abstract

We suggest that forward guidance, via publicly committing the central bank to future actions and creating associated expectations, fundamentally affects bank lending decisions independently of other forms of monetary policy. To test this hypothesis, we build a forward guidance measure based on the language used in the Federal Open Market Committee meetings and match this measure with syndicated loans. Our results show that expansionary forward guidance decreases corporate loan spreads and that this effect is stronger for well-capitalized banks lending to riskier firms. Forward guidance also affects nonprice lending terms, such as covenants, performance pricing provisions, and the loan syndicate structure. Additionally, banks tend to initiate new lending relationships with lower spreads after forward guidance issuance.

Keywords: Forward guidance; Monetary policy transmission; Bank lending; Corporate loans; Loan spreads; Syndicate structure; Bank-firm relationships

JEL Classification: G21; E52; E43; E58

Suggested Citation

Delis, Manthos D. and Hong, Sizhe and Paltalidis, Nikos and Philip, Dennis, Forward Guidance and Corporate Lending (September 1, 2021). Available at SSRN: https://ssrn.com/abstract=3520170 or http://dx.doi.org/10.2139/ssrn.3520170

Manthos D. Delis

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, 34080
France

Sizhe Hong

Durham University Business School ( email )

Mill Hill Lane
Durham, DH1 3LB
United Kingdom

Nikos Paltalidis (Contact Author)

Durham University Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Dennis Philip

Durham University - Department of Economics and Finance ( email )

Department of Economics and Finance
Mill Hill Lane
Durham, DH1 3LB
United Kingdom

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