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Public Information and Coordination: Evidence from a Credit Registry Expansion

43 Pages Posted: 6 Sep 2008 Last revised: 23 Jul 2011

Andrew Hertzberg

Columbia University - Columbia Business School - Finance and Economics

Jose Maria Liberti

Northwestern University - Kellogg School of Management; DePaul University

Daniel Paravisini

London School of Economics & Political Science (LSE)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2010

Abstract

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.

Keywords: Credit Markets, Coordination Failures

JEL Classification: G21, G38, D80, D82

Suggested Citation

Hertzberg, Andrew and Liberti, Jose Maria and Paravisini, Daniel, Public Information and Coordination: Evidence from a Credit Registry Expansion (May 2010). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1263594

Andrew Hertzberg

Columbia University - Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Jose Maria Liberti

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Jacobs 4203
Evanston, IL 60208
United States
(847) 491-5861 (Phone)
(847) 491-5719 (Fax)

HOME PAGE: http://www.kellogg.northwestern.edu/faculty/directory/liberti_jose.aspx

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States
(312) 362-8739 (Phone)
(312) 362-6566 (Fax)

Daniel Paravisini (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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