Did Regulation Fair Disclosure affect credit markets?

This study assesses whether the implementation of Regulation Fair Disclosure (Reg FD) has affected the quantity and quality of information in credit markets. We find that, after Reg FD, borrowing from new lenders was associated with a higher loan spread. We also document that, after Reg FD, (1) borrowers became more dependent on relationship lending; (2) lead lenders retained a higher loan share; and (3) a typical loan syndicate involved a smaller number of participating lenders. We interpret these results as evidence of an increased level of information asymmetry in credit markets after Reg FD.     

The Informational Role of the Media in Private Lending

We investigate whether a borrower's media coverage influences the syndicated loan origination and participation decisions of informationally disadvantaged lenders, loan syndicate structures, and interest spreads. In syndicated loan deals, information asymmetries can exist between lenders that have a relationship with a borrower and less informed, nonrelationship lenders competing to serve as lead arranger on a syndicated loan, and also between lead arrangers and less informed syndicate participants. Theory suggests that the aggressiveness with which less informed lenders compete for a loan deal increases in the sentiment of public information signals about a borrower. We extend this theory to syndicated loans and hypothesize that the likelihood of less informed lenders serving as the lead arranger or joining a loan syndicate is increasing in the sentiment of media‐initiated, borrower‐specific articles published prior to loan origination. We find that as media sentiment increases (1) outside, nonrelationship lenders have a higher probability of originating loans; (2) syndicate participants are less likely to have a previous relationship with the borrower or lead bank; (3) lead banks retain a lower percentage of loans; and (4) loan spreads decrease.     

Spillover effects of government initiatives fostering entrepreneurship on the access to bank credit for entrepreneurial firms in Europe

We explore the role of government initiatives fostering entrepreneurship—in the form of tax advantages and government support—in influencing the probability that entrepreneurial firms obtain bank credit and are not discouraged from applying for a loan. We propose that government initiatives fostering entrepreneurship should allow entrepreneurial firms to access more bank credit by reducing the risk incurred by lenders. We simultaneously estimate the probability of obtaining credit when a firm applies for a loan and the probability that the firm has been discouraged when it does not apply for a loan. In both cases we control for endogeneity. Our results are based on 18,872 observations (from the European Central Bank (ECB) SAFE dataset and Global Entrepreneurship Monitor – GEM) and show that government initiatives improve the probability of entrepreneurial firms obtaining bank credit but do not affect the probability of being discouraged from borrowing. The results also suggest that government initiatives fostering entrepreneurship are of most benefit to younger, smaller, high-growth, and more innovative firms that operate in contexts where the demand for, and accordingly the competition for, bank credit is strongest.     

Loan guarantees and credit supply

The efficiency of federal lending guarantees depends on whether guarantees increase lending supply or simply act as a subsidy to lenders. We use notches in the guarantee rate schedule for Small Business Administration (SBA) loans to estimate the elasticity of bank lending volume to loan guarantees. We show significant bunching in the loan distribution on the side of the size threshold that carries a more generous loan guarantee. The excess mass implies that increasing guarantee generosity by one percentage point of loan principal would increase per-loan lending volume by $19,000. Excess mass increases in periods with guarantee generosity, and placebo results indicate that the effect disappears when the guarantee notch is eliminated.     

The Cascade Effect on Lending Conditions: Evidence from the Syndicated Loan Market

This paper investigates, both theoretically and empirically, how interactions among potential lenders may influence contract terms via informational cascade in the syndicated loan market. Our model shows that the ex‐post observed interest rate is higher and the probability of syndication failure is lower when potential lenders can only observe the decisions of their predecessors versus when they can freely communicate with each other. Empirical tests confirm the model's predictions and the existence of a cascade effect on lending conditions. Using relational distance to proxy for the segmentation of communication, we find that relational distance is positively related to the loan spread and the requirements for collateral and guarantees, but negatively related to the probability of syndication failure.     

Attitudinal Asymmetries and the Lender-Borrower Relationship: Survey Results on Farm Lending in Shandong,China

This paper addresses the problem of social interactions and the lender-borrower relationship by measuring the disconnect between borrowers and lenders across a wide range of lending-related attributes. The degree by which lenders and borrowers connect disconnect depends on whether lenders’ and borrowers’ perceptions across these attributes are symmetric or asymmetric. We compare field survey results from 120 loan officers at Rural Credit Cooperatives (RCCs) in China’s coastal Shandong province, and pair them with an existing survey on identical questions to 394 farm households in the same region. Pairing lenders’ perception towards borrowers regarding RCC microcredit lending mechanism, against borrowers’ perception towards lenders and how themselves were perceived by lenders in the same regards, we observe on many dimensions a disconnect between them in the context of lenders’ “care” towards borrowers, loan rejection, memberships of RCC and group guarantee, lending concerns, cost of borrowing, reasons for default, credit rationing, and lending preferences. This research provides financial institutions with outreach mechanisms to borrowers, while also training lenders to borrowers’ sensitivities.     

The effect of information sharing between lenders on access to credit,cost of credit,and loan performance – Evidence from a credit registry introduction

Using a rich dataset from a commercial bank in Albania, we utilize the introduction of a public credit registry by the Albanian central bank in January 2008 as a natural experiment to analyze the effect of information sharing between lenders on (1) access to credit, (2) cost of credit, and (3) loan performance. Our results suggest that information sharing by means of a credit registry does not affect access to or cost of credit, but improves loan performance. Specifically, loans granted after the introduction of the credit registry are 3% points less likely of turning problematic, representing a 35% reduction of the overall sample average arrear probability. We further find that the effect is more pronounced for repeat borrowers and in areas, where competition is weak. This indicates that information sharing among lenders improves loan performance mainly by disciplining borrowers to repay in their concern about future access to credit.     

The gender gap in bank credit access

We use a sample of over 80,000 Spanish companies started by a sole entrepreneur between 2004 and 2014, and distinguish between male and female entrepreneurs demand for credit, credit approval ratio, and credit performance. We find that female entrepreneurs who start a business are less likely to ask for a loan. Of the female entrepreneurs requesting a credit, the probability of obtaining one in the founding year is significantly lower than their male peers in the same industry. This lower credit access disappears over the subsequent years, once the company has a track record of profits and losses. We also observe that women-led companies that receive a loan in the founding year are less likely to default as compared to men-led companies. This superior performance disappears for subsequent years, coinciding with the disappearance of the lower credit access. Taking all these results together, we rule out both taste-based discrimination and statistical discrimination in the credit industry, and point to the possible presence of double standards which might be a consequence of implicit (unconscious) discrimination.     

Management earnings forecasts and bank loan contracting

We find that firms tend to issue management earnings forecasts and convey good news before bank loan initiation. Issuing firms enjoy more favorable contracting terms and attract more lenders. Management forecasts issuance within a nine‐month period prior to the loan activating quarter can lower the subsequent loan spread by 14.06 basis points. Moreover, firms with larger management forecast errors are charged harsher contracting terms and attract fewer lenders. Our study suggests that firms strategically issue management earnings forecasts before entering into debt contracts and lenders incorporate the information contained in management earnings forecasts into bank loan contracting.     

Economic benefit of powerful credit scoring

We study the economic benefits from using credit scoring models. We contribute to the literature by relating the discriminatory power of a credit scoring model to the optimal credit decision. Given the receiver operating characteristic (ROC) curve, we derive (a) the profit-maximizing cutoff and (b) the pricing curve. Using these two concepts and a mixture thereof, we study a stylized loan market model with banks differing in the quality of their credit scoring model. Even for small quality differences, the variation in profitability among lenders is large and economically significant. We end our analysis by quantifying the impact on profits when information leaks from a competitor’s scoring model into the market.     

So what do I get? The bank's view of lending relationships

While many empirical studies document borrower benefits of lending relationships, less is known about lender benefits. A relationship lender's informational advantage over a non-relationship lender may generate a higher probability of selling information-sensitive products to its borrowers. Our results show that the probability of a relationship lender providing a future loan is 42%, while for a non-relationship lender, this probability is 3%. Consistent with theory, we find that borrowers with greater information asymmetries are significantly likely to obtain future loans from their relationship lenders. Relationship lenders are likely to be chosen to provide debt/equity underwriting services, but this effect is economically small.     

Unsecured credit markets are not insurance markets

We study the extent to which unsecured credit markets have altered the transmission of increased income risk to consumption variability over the past several decades. We find that unsecured credit markets pass through increased income risk to consumption, irrespective of bankruptcy policy and the information possessed by lenders. If risk sharing has indeed improved over this period, the reasons do not therefore lie in the unsecured credit market.     

Institutional stock trading on loan market information

One of the most important developments in the corporate loan market over the past decade has been the growing participation of institutional investors. As lenders, institutional investors routinely receive private information about borrowers. However, most of these investors also trade in public securities. This leads to a controversial question: Do institutional investors use private information acquired in the loan market to trade in public securities? This paper examines the stock trading of institutional investors whose portfolios also hold loans. Using the Securities and Exchange Commission filings of loan amendments, we identify institutional investors with access to private information disclosed during loan amendments. We then look at abnormal returns on subsequent stock trades. We find that institutional participants in loan renegotiations subsequently trade in the stock of the same company and outperform trades by other managers and trades in other stocks by approximately 5.4% in annualized terms.     

On syndicate composition, corporate structure and the certification effect of credit ratings

We assess the relative importance of ratings versus stock exchange listings in reducing information asymmetry using a dataset of syndicated loans to public and private firms in the UK. We find that the certification effect of ratings is largest for private firms and that syndicates are smallest if firms are privately held or unrated. Moreover, we find that the marginal effect of being stock exchange listed is insignificant once these firms are rated. Exploiting the heterogeneity among lenders, we find that especially foreign bank and non-bank investors do not provide capital if firms are unrated. Our paper highlights the information produced by rating agencies as an important mechanism by which ratings improve access to capital. Our results also emphasize the importance of syndicate moral hazard on the supply of uninformed capital: bank-borrower relationships significantly increase the loan share syndicated to investors particularly if firms are not listed and unrated.     

地理距离、契约设计与企业内部资本市场借贷风险防控——来自中国企业集团内部借贷交易的证据

地理因素对保持距离型市场交易的影响已被大量文献证实,但系统考察地理因素是否以及如何影响企业内部经济活动的研究仍十分匮乏。基于手工搜集整理的企业集团内部委托贷款这一独特数据,我们实证考察了地理距离对企业集团内部借贷契约设计的影响及相关的风险防控问题。实证结果显示,借贷距离越远,针对借款者的契约设计越严苛,不仅贷款者更可能要求借款者提供抵押担保,而且对资金用途施加限制的概率也大幅增加。进一步研究发现,与地理距离阻碍了信息搜集和监督的经济直觉一致,距离对企业内部借贷契约严苛性的推高作用会因为借贷双方之间的信息摩擦问题差异而改变。而且,基于借贷违约信息的检验结果表明,作为应对信息不对称的机制,动态调整契约严苛性这一精巧契约设计有效降低了企业内部贷款违约风险。本文不仅增进了对地理因素影响企业内部资本配置的认识,而且加深了对企业内部借贷契约设计的理解,从而对如何有效防控企业内部资本市场运作风险具有启示意义。     

Borrowing during periods of policy uncertainty: The role of foreign lenders

Despite the documented detrimental effect of policy uncertainty on borrowing costs, there is no evidence on the potential role of cross border borrowings during such periods. In this study, we test two hypotheses on the potential role of foreign lenders during periods of high policy uncertainty. The first is the common exposure hypothesis, which predicts that domestic lenders pass their uncertainty exposure on to borrowing firms by charging higher loan spreads. Hence, foreign lenders without such exposure could be able to help dispel policy uncertainty. The second is the information cost hypothesis, which predicts that foreign lenders compensate for information asymmetry when lending in host countries by charging high loan spreads, which suggests potential higher costs of foreign borrowing. We find that foreign lenders who are not simultaneously exposed to policy uncertainty charge lower loan spreads than domestic lenders, which supports the common exposure hypothesis. Additional analysis reveals that the two hypotheses complement each other, as the documented effect is particularly pronounced for foreign lenders who are exposed to lower information asymmetry. The findings of the study shed some light on the role of financial market integration during periods of high policy uncertainty.     

The effect of borrowers' accounting conservatism on lenders' loan loss provisions: Evidence from China's banking industry

This paper investigates how borrowers' accounting conservatism affects lenders' loan loss provisions in the Chinese banking context. We predict that when borrowers' financial statements are more conservative, lenders receive borrowers' bad news in a timelier manner and set aside more loan loss provisions. The empirical results confirm that borrowers' accounting conservatism is positively associated with lenders' loan loss provisions, as the former affects the latter via its impact on loan classification, and this positive association is more pronounced when information asymmetry is higher. In heterogeneity tests, we find that this positive association is stronger for non-state-owned, listed, and less prudent lenders and also varies across debt contract characteristics. Collectively, the results of this study offer insights into how lenders accrue loan losses when borrowers' financial reporting is more conservative.     

The Monitoring Incentive of Transactional and Relationship Lenders: Evidence from the Syndicated Loan Market

We identify a group of lenders specializing in syndicating tradable loans (referred to as transactional lenders [TLs]). We show that borrowers borrowing from TLs experience worse operating performance and more severe credit quality deterioration after loan origination compared to those borrowing from relationship lenders. This difference in the postloan issue performance remains robust after controlling for the potential self‐selection of the lender type, or using percentage of traded loans out of all syndicated loans to capture lenders’ propensity for syndicating tradable loans. Our results also remains qualitatively the same after we drop various types of risky loans.     

Interpretable credit model development via artificial neural networks

Poor credit granting decisions are coming back to haunt providers of loan finance. Past poor credit granting decisions are in part due to the Equal Credit Opportunity Act (1975). This act requires lenders to explain the decision to grant or refuse credit. As a result, models such as artificial neural networks, which offer improved ability to identify poor credit risks but which do not offer easy explanations of why a loan applicant has scored badly, remain unused. This paper investigates whether these models can be interpreted so that explanations for credit application rejection can be provided. The results indicate that while the artificial neural networks can be used (with caution) to develop credit scoring models, the limitations imposed by the credit granting process make their use unlikely until interpretation techniques are developed that are more robust and that can interpret multiple hidden-layer artificial neural networks. Copyright © 2008 John Wiley & Sons, Ltd.     

How changes in market conditions affect screening activity,credit risk,and the lending behaviour of banks

The global financial crisis dramatically transformed the market conditions in the banking industry. We construct a theoretical model of spatial competition that considers the differential information between lenders and loan applicants to explore how changes in the market structure affect the lending behaviour of banks and their incentives to invest in screening and how this, in turn, affects the level of credit risk in the economy. Our findings reveal that enhanced competition reduces lending cost thus encouraging the entry of new customers in credit markets. Also, that the transportation cost that loan applicants are required to pay to reach the bank of their interest shrinks with respect to the degree of competition. We further lend support to the view that stiffer competition has an increasing impact on the level of credit risk. Notably, we find that competition strengthens the incentives of banks to engage in screening activity and that screening serves as a protection mechanism that can provide banks with a shield against bad loans. Overall, when market conditions are substantially distorted, this has a dilutive impact on the incentives mechanism of banks to screen their applicants. We provide empirical evidence which is consistent with the conceptual underpinnings of our theoretical model and the obtained findings.