Information asymmetry,external certification,and the cost of bank debt |
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| Institution: | 1. Department of Economics, University of Insubria and MoFiR, 71 Via Monte Generoso, 21100 Varese, Italy;2. Lindner College of Business, University of Cincinnati and MoFiR, 2906 Woodside Drive, Cincinnati, OH 45221, USA;3. Department of Economics, Society and Politics, University of Urbino Carlo Bo and MoFiR, 42 Via Saffi, 61029 Urbino, Italy;4. Department of Economics and Statistics, University of Naples Federico II, CSEF, and MoFiR, 21 Via Cintia, 80126 Naples, Italy;1. Department of Economics and Finance, Woody L. Hunt College of Business, The University of Texas at El Paso, 500 W. University Ave., El Paso, TX 79968, United States of America;2. Department of Finance, College of Business, Florida State University, United States of America;1. Monetary and Economic Department, Bank for International Settlements, Basel, Switzerland;2. Finance Department, School of Business Administration, American University of Sharjah, PO Box 26666, Sharjah, United Arab Emirates;3. Department of Economics and Finance, Brunel University London, Uxbridge, Middlesex UB8 3PH, UK;1. Research Center of Finance, Shanghai Business School, Shanghai, China;2. Department of Finance, College of Commerce, National Chengchi University, 64, Section 2, ZhiNan Rd., Taipei City, Taiwan;3. School of Economics, Utrecht University, Utrecht, The Netherlands;4. CEPR, London, United Kingdom;1. RB 239A, Department of Finance, College of Business Administration, Florida International University, Miami, FL 33199, United States of America;2. Finance and accounting Area, Indian Institute of Management, Indore, India |
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| Abstract: | This paper examines how the cost of bank debt reflects public information about borrower quality, and whether such information complements or substitutes the private information of banks. Using a sample of small business loans, and the award of a competitive public subsidy as an observable positive signal of external certification, we find that certification is associated with a lower cost of debt for subsidy recipients if the amount of private information of the lender is limited or the local credit market is less competitive. Public information loses importance once the bank accumulates information over the course of the lending relationship or the credit market is more competitive. Our results highlight a positive effect of external certification, driven by the signal it provides to both the lending bank and its competitors, and suggest that public and private information can be substitutes in the pricing of bank debt. |
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