Product Network Connectivity and Information for Loan Pricing

Jiangtao Fu and Yoshiaki Ogura

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: A theory predicts that loan pricing is less sensitive to public information, such as a credit score provided by a credit information vendor, if the lender obtains more accurate private information about the credit quality of borrowers. We find that loan pricing is less sensitive to public information when a borrower is more connected with other borrowers of the lender through a supply network by using a unique database of inter-firm relationships and bank-firm relationships. This effect is significant statistically and economically after controlling for the bank-firm or inter-firm relationship characteristics and other firm characteristics. This finding provides evidence that banks make use of private information observed from their borrowers' network in their loan pricing.

Pages: 31 pages
Date: 2017-03
New Economics Papers: this item is included in nep-ban
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