The Externalities of Information: Lending to Peer Firms

 

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Author: Yangming Bao, Goethe University Frankfurt and SAFE

Abstract: In this paper, I empirically analyze the externalities of information in bank lending behavior. Using syndicated loan data, I find that banks would accept 10 basis points lower loan rates when lending to their previous borrowers’ local peers, after controlling for the concentration risk of loan portfolios as well as any bank-year characteristics. I argue this is because banks can reuse the information they collected before and thus reduce lending costs. Using misconduct records as exogenous events, I find that the beneficial loan terms offered to a borrower vanish after its local peers committed fraud, since it deteriorates banks’ information set. Moreover, banks also decrease lending to this group of firms, indicating that bad information can pose negative externalities on local peers in terms of credit availability.

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