Maturity and Corporate Loan Pricing

We investigate the relation between corporate loan spreads and maturity to test whether lenders are compensated for longer maturity loans (tradeoff hypothesis) or limit their exposure by forcing riskier borrowers to take short-term loans (credit-quality hypothesis). Earlier studies reject the tradeoff hypothesis. We use the LPC DealScan database to create a matched sample of pairs of loans to the same borrower on the same day holding credit quality constant. We perform mean of difference tests and cross-sectional and regression analyses, and find evidence supporting both the tradeoff and credit quality hypotheses. Copyright 2004 by the Eastern Finance Association.