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Loan origination and risk underpricing: The role of lending incentives

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  • SHEN, Yu
  • SHE, Kaiwen

Abstract

This paper investigates how volume-based lending incentives affect the pricing of loans. Using a comprehensive loan record from a large Chinese bank, we examine the response of loan origination behavior to volume-based lending incentives. We observe a direct effect of volume-based lending incentives, with the number and volumes of loans rising near the month-end. Moreover, we identify a significant underpricing of risk in loans originated at the end of the month. Specifically, these loans exhibit higher risk, yet they are initially priced at a lower interest rate. This underpricing occurs through a combination of ranking pressure and overstate of hard information in loan screening.

Suggested Citation

  • SHEN, Yu & SHE, Kaiwen, 2024. "Loan origination and risk underpricing: The role of lending incentives," Finance Research Letters, Elsevier, vol. 62(PB).
    • Handle: RePEc:eee:finlet:v:62:y:2024:i:pb:s1544612324003076
    DOI: 10.1016/j.frl.2024.105277
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    More about this item

    Keywords

    Lending incentives; Loan underpricing; Hard information;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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