Forward guidance and corporate lending

We suggest that forward guidance, via publicly committing the central bank to future actions and creating associated expectations, fundamentally affects bank lending decisions independently of other forms of monetary policy. To test this hypothesis, we build a forward guidance measure based on the language used in the Federal Open Market Committee meetings and match this measure with syndicated loans. Our results show that expansionary forward guidance decreases corporate loan spreads and that this effect is stronger for well-capitalized banks lending to riskier firms. Forward guidance also affects nonprice lending terms, such as covenants, performance pricing provisions, and the loan syndicate structure. Additionally, banks tend to initiate new lending relationships with lower spreads after forward guidance issuance.

This is a pre-copyedited, author-produced version of an article accepted for publication in Review of Finance following peer review. The version of record Manthos D Delis, Sizhe Hong, Nikos Paltalidis, Dennis Philip, Forward Guidance and Corporate Lending, Review of Finance, Volume 26, Issue 4, July 2022, Pages 899–935, is available online at: https://academic.oup.com/rof/advance-article-abstract/doi/10.1093/ro... and https://doi.org/10.1093/rof/rfab027