Information Frictions, Credit Constraints, and Distant Borrowing

Abstract

We offer a novel explanation for why firms choose to borrow from distant banks, focusing on information frictions rather than bank competition. Firms may intentionally seek out distant lenders, despite incurring higher transportation costs, to raise lenders' information production costs. This strategy allows firms to secure loans under information-insensitive contracts, mitigating credit constraints and avoiding the need to compensate banks for information production. High-quality firms are more likely to borrow from distant banks, while higher transportation costs discourage such behavior. The model also explains the procyclical nature of borrower-lender distances. Using unique transaction-level loan data that identifies the locations of both borrowers and lenders, we provide consistent empirical evidence supporting these theoretical predictions.

Keywords: Information Sensitivity, Distant Borrowing, Credit Constrains, Geographical Distance, Information Asymmetry

JEL Classification: D82, G21, G32