Hidden gems and borrowers with dirty little secrets: investment in soft information, borrower self-selection and competition

Reint Gropp, Christian Gruendl and Andre Guettler

No 1555, Working Paper Series from European Central Bank

Abstract: This paper empirically examines the role of soft information in the competitive interaction between relationship and transaction banks. Soft information can be interpreted as a private signal about the quality of a firm that is observable to a relationship bank, but not to a transaction bank. We show that borrowers self-select to relationship banks depending on whether their privately observed soft information is positive or negative. Competition affects the investment in learning the private signal from firms by relationship banks and transaction banks asymmetrically. Relationship banks invest more; transaction banks invest less in soft information, exacerbating the selection effect. Finally, we show that firms where soft information was important in the lending decision were no more likely to default compared to firms where only financial information was used. JEL Classification: G21, G28, G32

Keywords: competition; discretionary lending; relationship lending; soft information (search for similar items in EconPapers)
Date: 2013-06
New Economics Papers: this item is included in nep-cdm and nep-cta
Note: 56868
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1555.pdf (application/pdf)

Related works:
Journal Article: Hidden gems and borrowers with dirty little secrets: Investment in soft information, borrower self-selection and competition (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20131555

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().