This paper documents that the path of credit spreads since a firm’s last loan influences
the level at which it can currently borrow. If spreads have moved in the firm’s
favor (i.e., declined), it is charged a higher interest rate than justified by current fundamentals,
and if spreads have moved to its detriment, it is charged a lower rate. We
evaluate several possible explanations for this finding, and conclude that anchoring
(Tversky and Kahneman [1974]) to past deal terms is most plausible.