43 Pages Posted: 6 Sep 2008 Last revised: 23 Jul 2011
Date Written: May 2010
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: 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