Distance and Private Information

43 Pages Posted: 29 Mar 2008  

Sumit Agarwal

Georgetown University - Department of Finance

Robert B. H. Hauswald

American University - Department of Finance and Real Estate

Date Written: March 1, 2007

Abstract

Using a unique data set of loan applications by small businesses, we study the determinants of loan transactions focusing on the respective roles of private information and borrower proximity. Although credit availability and the offered loan rate decrease in the bank-borrower distance and increase in the borrower-competitor distance, the inclusion of proxies for the bank's proprietary and private information reduces these effects to the point of insignificance. Analyzing loan rates and borrowers' decision to switch lenders we find strong evidence for the informational capture of good credit risks. Our results shed new light on the importance of soft information in informationally opaque credit markets and show how borrower proximity facilitates the production of proprietary intelligence that helps banks to exploit information asymmetries and to locally carve out captive markets.

Keywords: Distance, Small Business, Information Asymmetries, Banking

JEL Classification: G21, L11, L14, D44

Suggested Citation

Agarwal, Sumit and Hauswald, Robert B. H., Distance and Private Information (March 1, 2007). Available at SSRN: https://ssrn.com/abstract=996602 or http://dx.doi.org/10.2139/ssrn.996602

Sumit Agarwal (Contact Author)

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-8207 (Phone)

HOME PAGE: http://www.ushakrisna.com

Robert B.H. Hauswald

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-1996 (Phone)
202-885-1946 (Fax)

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