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

Reint Gropp and Andre Guettler

Journal of Banking & Finance, 2018, vol. 87, issue C, 26-39

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 valuable 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 observed soft information is positive or negative. Competition affects the investment in learning the soft information from firms by relationship banks and transaction banks asymmetrically. Relationship banks invest more; transaction banks invest less in soft information, exacerbating the selection effect.

Keywords: Soft information; Discretionary lending; Relationship lending; Competition (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Working Paper: Hidden gems and borrowers with dirty little secrets: investment in soft information, borrower self-selection and competition (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:87:y:2018:i:c:p:26-39

DOI: 10.1016/j.jbankfin.2017.09.014

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