Ripple effects of borrower’s default decisions on P2P markets

Yong Lu, Qiang Gao (), Liya Hou (), Yanni Hu () and Jian Huang ()
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Yong Lu: College of Business, University of West Florida, 11000 University Pkwy, Pensacola, FL 32514, USA
Qiang Gao: #x2020;Zicklin School of Business, Baruch College, City University of New York, 55 Lexington Ave at 24th Street, New York, NY 10010, USA
Liya Hou: #x2021;Department of Accounting, Herberger Business School St. Cloud State University, 720 4th Avenue South, St. Cloud, MN 56301, USA
Yanni Hu: #x2020;Zicklin School of Business, Baruch College, City University of New York, 55 Lexington Ave at 24th Street, New York, NY 10010, USA
Jian Huang: #xA7;Department of Finance, Towson University, 8000 York Road, Towson, MD 21252, USA

International Journal of Financial Engineering (IJFE), 2021, vol. 08, issue 02, 1-26

Abstract: Default is the most critical concern in any financial market. We study the ripple effects of borrower’s default behavior in online peer-to-peer lending with a longitudinal and comprehensive dataset consisting of 347,752 loan listings. Previous studies researched several variables that determine the default risk. We examine how both online and offline friendship networks affect borrower’s default behaviors. We found the borrowers are significantly impacted by the default behaviors of their social networks. The borrowers who have defaulter friends are twice likely to default than the borrowers who do not have.Nevertheless, not all friend types have equal influences. The impact is stronger for online friends while much weaker for offline friends. We further explain that default records could harm a person’s social image and cause social stigma costs. This study is one of the first to investigate the default decision-making in online financial market. It has significant theoretical and practical contributions to grasp the borrower’s default behaviors and further diminish default risk to stabilize the financial market.

Keywords: Default behavior; peer-to-peer markets; social capital; social network (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S2424786320500553

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