AAA Spark Meeting of Regions

Who Anchors on Credit Spreads

• In Event: Banking, Credits, and Wealth Building

Abstract

This paper studies the anchoring behaviors in the credit market during the post-crisis period. I find that banks take advantage of anchoring on a firm’s borrowing history to gain benefit. When the average credit spreads move in the firm’s favor (i.e., spreads decrease since the last borrowing), banks charge higher loan costs than those justified by the firm fundamentals. However, when the spreads move to the firm’s detriment, the firm cannot enjoy the discount. This relationship becomes attenuated for firms with higher cash flow, lower leverage, and have access to the public bond market. My findings suggest that banks are not subject to anchoring bias unintendedly, rather strategically anchor on historical information.

Author

• Yang Wang, The Hong Kong Polytechnic University