Information from Relationship Lending: Evidence from China
AbstractWe study the economic role of banks’ soft information, which evolved from repeated lending relationships, in the context of loan default. Using a proprietary database from one of the largest state-owned commercial banks in China, we find that the bank’s internal credit rating scores play a significant role in default prediction. While the internal credit rating incorporates firm-specific hard information such as financial ratios, it is the soft information component of these ratings that contributes to the improvement in assessing credit quality. More importantly, the relative importance of soft information over hard information depends on the depth of the lending relationship. When evaluating loan delinquency, a strong lending relationship allows soft information to substitute for, rather than complement to, the role of hard information, especially the hard information that is subject to easy manipulation by Chinese firms.
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Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2009-39 S.
Date of creation: 2009
Date of revision:
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Web page: http://center.uvt.nl
Debt default; internal credit ratings; credit risk; relationship lending; soft information;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
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