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

67 Pages Posted: 24 Jun 2019 Last revised: 23 May 2022

See all articles by Daniel R. Carvalho

Daniel R. Carvalho

Indiana University - Kelley School of Business

Janet Gao

Indiana University - Kelley School of Business

Pengfei Ma

Indiana University - Kelley School of Business

Date Written: May 19, 2022

Abstract

Do changes in lender optimism 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 analyze the role of sophisticated lenders’ personal economic experiences as a mechanism driving such fluctuations. We provide evidence that lenders overweight their recent locally experienced economic conditions, captured by local housing price growth, and this systematically shapes credit spreads for borrowers that own real estate assets and riskier loans. Our analysis suggests that these effects are driven by the beliefs of sophisticated lenders about real estate values.

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 (May 19, 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

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

Pengfei Ma

Indiana University - Kelley School of Business ( email )

Bloomington, IN 47405
United States

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

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