Business Credit Information Sharing and Default Risk of Private Firms

Posted: 13 Nov 2011 Last revised: 27 Aug 2013

See all articles by Maik Dierkes

Maik Dierkes

Leibniz University Hannover

Carsten Erner

Thomas Langer

University of Muenster - Finance Center

Lars Norden

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE); Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças

Date Written: May 23, 2013

Abstract

We investigate whether and how business credit information sharing helps to better assess the default risk of private firms. Private firms represent an ideal testing ground because they are smaller, more informationally opaque, riskier, and more dependent on trade credit and bank loans than public firms. Based on a representative panel dataset that comprises private firms from all major industries, we find that business credit information sharing substantially improves the quality of default predictions. The improvement is stronger for older firms and those with limited liability, and depends on the sharing of firms’ payment history and the number of firms covered by the local credit bureau office. The value of soft business credit information is higher the smaller the firms and the lower their distance from the local credit bureau office. Furthermore, in spatial and industry analyses we show that the higher the value of business credit information the lower the realized default rates. Our study highlights the channel through which business credit information sharing adds value and the factors that influence its strength.

Keywords: credit risk, asymmetric information, credit bureau, hard and soft information, private firms

JEL Classification: D82, G21, G32, G33

Suggested Citation

Dierkes, Maik and Erner, Carsten and Langer, Thomas and Norden, Lars, Business Credit Information Sharing and Default Risk of Private Firms (May 23, 2013). Journal of Banking and Finance, Vol. 37, 2867-2878, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1958650 or http://dx.doi.org/10.2139/ssrn.1958650

Maik Dierkes

Leibniz University Hannover ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

Thomas Langer

University of Muenster - Finance Center ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 22033 (Phone)

Lars Norden (Contact Author)

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE) ( email )

Rua Jornalista Orlando Dantas 30
Rio de Janeiro, 22231-010
Brazil
+552130832431 (Phone)

HOME PAGE: http://www.larsnorden.de

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil

No contact information is available for Carsten Erner

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