Public Information and Coordination: Evidence from a Credit Registry Expansion
Columbia University - Columbia Business School - Finance and Economics
Jose Maria Liberti
Kellogg School of Management, Northwestern University; DePaul University
London School of Economics & Political Science (LSE); Columbia Business School - Finance and Economics
Journal of Finance, Forthcoming
This paper provides evidence that lenders to a firm close to distress have incentives to coordinate: lower financing by one lender reduces firm creditworthiness and causes other lenders to reduce financing. To isolate the coordination channel from lenders' joint reaction to new information, we exploit a natural experiment that made lenders' negative private assessments about their borrowers public. We show that lenders, while learning nothing new about the firm, reduce credit in anticipation of the reaction by other lenders to the same firm. The results show that public information exacerbates lender coordination and increases the incidence of firm financial distress.
Number of Pages in PDF File: 43
Keywords: Credit Markets, Coordination Failures
JEL Classification: G21, G38, D80, D82Accepted Paper Series
Date posted: September 6, 2008 ; Last revised: July 23, 2011
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