The Effect of Secondary Market Closure on Primary Market Funding Time: Evidence from Peer-to-Peer Lending

Abstract

We derive the theoretical result that the existence of a secondary market increases primary market liquidity in the form of a shorter funding time, which is an important measure of market liquidity. Using intraday peer-to-peer issuance data, we find that the closure of Prosper’s secondary market reduces its primary market liquidity, including longer times to fund loans, a smaller fraction of loans to be funded in the first hour, and a lower percentage of loan listings to be funded ultimately. We also find a positive spillover on the primary market liquidity of its competitor, Lending Club. Moreover, we find robust results when Lending Club unexpectedly closed its secondary market four years later, which increases the funding time and reduces the fraction of loans funded in the first hour in its primary market.

Keywords: Market liquidity, Funding Time, Secondary Market, Primary Market, P2P lending

JEL Classification: G12, G23