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: 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.

Date: 2005
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