Negotiation and the Clustering of Corporate Loan Spreads


Most corporate loans are priced at rounded spreads, e.g. spreads that are a multiple of 25 basis points. Using a sample of 16,598 loan tranches signed by US borrowers between January 1988 and December 2010, this study explores the determinants of such interest rate clustering in the corporate syndicated loan market. We postulate that lead arrangers round spreads upwards because of the uncertainty about the riskiness of the borrowers. Consistent with this negotiation hypothesis, we find that clustering increases with the degree of uncertainty, e.g. the degree of information asymmetry between the lead arranger and the borrower. In contrast, clustering is less likely when lead arrangers have acquired information about the borrower through prior interactions. Finally, the fear of reputation loss incentivizes the most reputable lead arrangers to price loans at more competitive non-rounded spreads.

Divisions: College of Business and Social Sciences > Aston Business School
Additional Information: © The Authors
Last Modified: 24 Apr 2024 07:29
Date Deposited: 15 Nov 2018 13:44
PURE Output Type: Working paper
Published Date: 2013-03-09
Authors: Kleimeier, Stefanie
Chaudhry, Sajid (ORCID Profile 0000-0001-8769-8920)



Version: Published Version

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