Loan origination and risk underpricing: The role of lending incentives

Yu Shen and Kaiwen She

Finance Research Letters, 2024, vol. 62, issue PB

Abstract: This paper investigates how volume-based lending incentives affect the pricing of loans. Using a comprehensive loan record from a large Chinese bank, we examine the response of loan origination behavior to volume-based lending incentives. We observe a direct effect of volume-based lending incentives, with the number and volumes of loans rising near the month-end. Moreover, we identify a significant underpricing of risk in loans originated at the end of the month. Specifically, these loans exhibit higher risk, yet they are initially priced at a lower interest rate. This underpricing occurs through a combination of ranking pressure and overstate of hard information in loan screening.

Keywords: Lending incentives; Loan underpricing; Hard information (search for similar items in EconPapers)
JEL-codes: G21 M52 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:62:y:2024:i:pb:s1544612324003076

DOI: 10.1016/j.frl.2024.105277

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