The Financial Consequences of Online Review Aggregators: Evidence from Yelp Ratings and SBA Loans

Abstract

This paper demonstrates the financial and real consequences of online review aggregators using a novel and comprehensive Yelp dataset. Exploiting a regression discontinuity design that overcomes the potentially endogenous relationship between Yelp reviews and loan outcomes, I show that coarse Yelp ratings are significant indicators of the outcomes. More specifically, a one-half star increase in Yelp ratings leads to better loan terms and subsequently better loan performance. The results are more pronounced when banks have less information about the borrowers. Yelp ratings become less effective when an existing lending relationship is present. Higher Yelp ratings also lead to increases in consumer demand and the likelihood of subsequent business opening. Overall, the paper provides evidence that online review aggregators influence both customers’ choice of consumption and banks’ financing decisions.

Keywords: Online Review, Credit Rating, Small Business Loan, Bank Lending

JEL Classification: G21, G30, H81, L15