Product Network Connectivity and Information for Loan Pricing

Author Name Jiangtao FU (Waseda University) / OGURA Yoshiaki (Waseda University)
Creation Date/NO. March 2017 17-E-028
Research Project Study on Corporate Finance and Firm Dynamics
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A theory predicts that loan pricing is less sensitive to public information, such as a credit score provided by a credit information vendor, if the lender obtains more accurate private information about the credit quality of borrowers. We find that loan pricing is less sensitive to public information when a borrower is more connected with other borrowers of the lender through a supply network by using a unique database of inter-firm relationships and bank-firm relationships. This effect is significant statistically and economically after controlling for the bank-firm or inter-firm relationship characteristics and other firm characteristics. This finding provides evidence that banks make use of private information observed from their borrowers' network in their loan pricing.