Lending to Small Businesses: The Value of Soft Information
University of St. Gallen - School of Finance
January 28, 2011
We examine whether banks use soft information in their lending decisions. To overcome the problem of soft information measurement, we analyze whether publicly available variables that are correlated with the borrowers' credit quality are more significant in explaining the lending decisions of banks that have no soft information. We find that the power of these variables to predict credit outcomes is lower whenever the bank has access to soft information. The results indicate the importance of soft information in small business lending, and are robust to several measures of soft information availability, and to a potentially endogenous relationship between soft information and credit quality.
Number of Pages in PDF File: 40
Keywords: Soft information, banking, credit history, reputation
JEL Classification: G21, G32, D82
Date posted: January 31, 2011