Publication Type

Journal Article

Version

submittedVersion

Publication Date

3-2023

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

Personal experiences, Credit cycle, Loan officers, Lender optimism, Sophisticated investors, Real estate prices

Discipline

Corporate Finance | Finance and Financial Management

Research Areas

Finance

Publication

Journal of Financial Economics

Volume

148

Issue

2

First Page

118

Last Page

149

ISSN

0304-405X

Identifier

10.1016/j.jfineco.2023.02.003

Publisher

Elsevier

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1016/j.jfineco.2023.02.003

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