Sharing Information in the Credit Market: Contract-Level Evidence from U.S. Firms

Abstract:     
We study the impact of lenders' information sharing on credit market performance using contract-level data from a major U.S. credit bureau that serves the equipment finance industry. The staggered entry of lenders into the bureau, the richness of the data set (28,000 loans and leases extended to roughly 4,000 businesses), and the small and medium size of borrowing firms offer a suitable natural experiment to identify the effect of lenders' improved access to information. In line with the predictions of Pagano and Jappelli (1993) and Padilla and Pagano (1997, 2000), we find that information sharing reduces firms' delinquencies on loans and leases, and that this effect is more pronouned for informationally opaque and risky businesses. The results also document that information sharing induces creditors to grant smaller and shorter-term loans and to demand more guarantees. Thus, information sharing appears to improve firms' repayment performance but not necessarily leads financiers to loosen their lending standards.

Number of Pages in PDF File: 76

Keywords: Information asymmetries, Credit contracts, Credit bureaus.

JEL Classification: D82, G21

working papers series