Business credit information sharing and default risk of private firms

Maik Dierkes, Carsten Erner, Thomas Langer and Lars Norden ()
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Maik Dierkes: Finance Center M nster, University of M nster
Carsten Erner: Finance Center M nster, University of M nster
Thomas Langer: Finance Center M nster, University of M nster
Lars Norden: Rotterdam School of Management, Erasmus University

No 64, Mo.Fi.R. Working Papers from Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences

Abstract: We investigate whether and how business credit information sharing helps to better assess the default risk of private firms. Private firms represent an ideal testing ground because they are smaller, more informationally opaque, riskier, and more dependent on trade credit and bank loans than public firms. Based on a representative panel dataset that comprises private firms from all major industries, we find that business credit information sharing substantially improves the quality of default predictions. The improvement is stronger for older firms and those with limited liability, and depends on the sharing of firms' payment history and the number of firms covered by the local credit bureau office. The value of soft business credit information is higher for smaller and less distant firms. Furthermore, in spatial and industry analyses we show that the higher the value of business credit information the lower the realized default rates. Our study highlights the channel through which business credit information sharing adds value and the factors that influence its strength.

Keywords: Asymmetric information; Credit bureau; Credit risk; Hard and soft information; Private firms (search for similar items in EconPapers)
JEL-codes: D82 G21 G32 G33 (search for similar items in EconPapers)
Pages: 39
Date: 2012-03
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cta, nep-fmk and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:anc:wmofir:64

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