Do Banks Have Private Information? Bank screening and ex-post small firm performance

Author Name HOSONO Kaoru  (Gakushuin University) /XU Peng  (Hosei University)
Creation Date/NO. April 2009 09-E-016
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This paper examines whether commercial banks screen loan applications based on private information on firms' future profitability, and consequently how banks' ex-ante private information and screening decisions affect firms' ex-post profitability. Using a dataset of banks' loan application screenings and the ex-post firm performance for Japanese SMEs, we obtained strong evidences suggesting that banks' ex-ante private information was related to firms' ex-post performance. We found this relationship to be especially strong for small, mature firms, which supports the relationship-lending hypothesis.