Negotiation and the Clustering of Corporate Loan Spreads

Stefanie Kleimeier, Sajid Chaudhry

Research output: Preprint or Working paperWorking paper


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.
Original languageEnglish
Publication statusPublished - 9 Mar 2013

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