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The Role of Private Knowledge in Reducing the Information Wedge: A Research Note

Aoife Hanley and Jonathan Crook

Journal of Business Finance & Accounting, 2005, vol. 32, issue 1-2, 415-433

Abstract: In this first ever study to examine the marginal importance of collateral level "vis-à-vis" reputation in reducing information asymmetry, we find using unique data for UK business credit, that pre-existing reputation is the single-most important determinant in inducing a bank to extend a loan. Moreover, a bank responds positively to higher levels of collateral and negatively to higher credit requests. Similar to Cole (1998) , but controlling for collateral level, we find that it helps to have banked with the lender before. Non-trivial information search costs imply an important role for reputation in extending credits. Copyright Blackwell Publishers Ltd, 2005.

Date: 2005
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