Communication of Soft Information to Lenders: Credibility and Reputation

Abstract

Borrowers' reputation concerns makes communication of soft or non-verifiable information credible. We find that some misreporting of short-term information has costs as well as benefits. The costs are due to inefficient management of investments, while the benefits are due to the fact that some short-term misreporting facilitates signaling of a firm's long-term prospects. We discuss how monitoring of an ongoing project may deprive a firm of using its communication strategy to signal long-term prospects.

Keywords: Soft information, reputation, credibility, monitoring, loans

JEL Classification: D82, G21, L14, M40