Asymmetric Information and Corporate Lending: Evidence from SME Bond Markets
50 Pages Posted: 13 Oct 2020 Last revised: 19 Mar 2021
Date Written: September 29, 2020
Using a comprehensive dataset of Italian SMEs, we find that differences between private and public information on firm creditworthiness affect the decision to issue traded debt securities. Specifically, holding public information constant, firms with better private fundamentals are more likely to access bond markets. Additionally, credit conditions improve for issuers following the bond placement, compared with a matched sample of non-issuers. Thus, our evidence supports 'positive' (rather than adverse) selection in corporate bond markets. This is consistent with a model where banks offer more flexibility than markets during financial distress and firms use market lending to signal credit quality to outside stakeholders.
Keywords: asymmetric information, bank credit, bond markets, SME finance
JEL Classification: G10, G21, G23, G32
Suggested Citation: Suggested Citation