Hidden Gems and Borrowers with Dirty Little Secrets: Investment in Soft Information, Borrower Self-Selection and Competition

52 Pages Posted: 2 Jul 2013 Last revised: 11 Oct 2017

See all articles by Reint Gropp

Reint Gropp

Halle Institute for Economic Research

Andre Guettler

University of Ulm - Department of Mathematics and Economics; Halle Institute for Economic Research

Multiple version iconThere are 2 versions of this paper

Date Written: August 3, 2017

Abstract

This paper empirically examines the role of soft information in the competitive interaction between relationship and transaction banks. Soft information can be interpreted as a valuable signal about the quality of a firm that is observable to a relationship bank, but not to a transaction bank. We show that borrowers self-select to relationship banks depending on whether their observed soft information is positive or negative. Competition affects the investment in learning the soft information from firms by relationship banks and transaction banks asymmetrically. Relationship banks invest more; transaction banks invest less in soft information, exacerbating the selection effect.

Keywords: soft information, discretionary lending, relationship lending, competition

JEL Classification: G21, G28, G32

Suggested Citation

Gropp, Reint and Guettler, Andre, Hidden Gems and Borrowers with Dirty Little Secrets: Investment in Soft Information, Borrower Self-Selection and Competition (August 3, 2017). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2287866 or http://dx.doi.org/10.2139/ssrn.2287866

Reint Gropp

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Andre Guettler (Contact Author)

University of Ulm - Department of Mathematics and Economics ( email )

Helmholzstrasse
Ulm, D-89081
Germany

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

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