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Business credit information sharing and default risk of private firms

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Author Info

  • Maik Dierkes

    (Finance Center Mnster, University of Mnster)

  • Carsten Erner

    (Finance Center Mnster, University of Mnster)

  • Thomas Langer

    (Finance Center Mnster, University of Mnster)

  • Lars Norden

    ()
    (Rotterdam School of Management, Erasmus University)

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    Abstract

    We investigate whether and how business credit information sharing helps to better assess the default risk of private firms. Private firms represent an ideal testing ground because they are smaller, more informationally opaque, riskier, and more dependent on trade credit and bank loans than public firms. Based on a representative panel dataset that comprises private firms from all major industries, we find that business credit information sharing substantially improves the quality of default predictions. The improvement is stronger for older firms and those with limited liability, and depends on the sharing of firms' payment history and the number of firms covered by the local credit bureau office. The value of soft business credit information is higher for smaller and less distant firms. Furthermore, in spatial and industry analyses we show that the higher the value of business credit information the lower the realized default rates. Our study highlights the channel through which business credit information sharing adds value and the factors that influence its strength.

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    File URL: http://docs.dises.univpm.it/web/quaderni/pdfmofir/Mofir064.pdf
    File Function: First version, 2012
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    Bibliographic Info

    Paper provided by Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences in its series Mo.Fi.R. Working Papers with number 64.

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    Length: 39
    Date of creation: Mar 2012
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    Handle: RePEc:anc:wmofir:64

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    Keywords: Asymmetric information; Credit bureau; Credit risk; Hard and soft information; Private firms;

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    1. DeYoung, Robert & Glennon, Dennis & Nigro, Peter, 2008. "Borrower-lender distance, credit scoring, and loan performance: Evidence from informational-opaque small business borrowers," Journal of Financial Intermediation, Elsevier, vol. 17(1), pages 113-143, January.
    2. Tsai, Hsiangping & Chang, Yuanchen & Hsiao, Pei-Hsin, 2011. "What drives foreign expansion of the top 100 multinational banks? The role of the credit reporting system," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 588-605, March.
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    15. Doblas-Madrid, Antonio & Minetti, Raoul, 2013. "Sharing information in the credit market: Contract-level evidence from U.S. firms," Journal of Financial Economics, Elsevier, vol. 109(1), pages 198-223.
    16. Pietro Alessandrini & Andrea F. Presbitero & Alberto Zazzaro, 2009. "Banks, Distances and Firms' Financing Constraints," Review of Finance, European Finance Association, vol. 13(2), pages 261-307.
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