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Information asymmetry, external certification, and the cost of bank debt

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  • Bellucci, Andrea
  • Borisov, Alexander
  • Giombini, Germana
  • Zazzaro, Alberto

Abstract

This paper examines how the cost of bank debt reflects public information about borrower quality, and whether such information complements or substitutes the private information of banks. Using a sample of small business loans, and the award of a competitive public subsidy as an observable positive signal of external certification, we find that certification is associated with a lower cost of debt for subsidy recipients if the amount of private information of the lender is limited or the local credit market is less competitive. Public information loses importance once the bank accumulates information over the course of the lending relationship or the credit market is more competitive. Our results highlight a positive effect of external certification, driven by the signal it provides to both the lending bank and its competitors, and suggest that public and private information can be substitutes in the pricing of bank debt.

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  • Bellucci, Andrea & Borisov, Alexander & Giombini, Germana & Zazzaro, Alberto, 2023. "Information asymmetry, external certification, and the cost of bank debt," Journal of Corporate Finance, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:corfin:v:78:y:2023:i:c:s0929119922001791
    DOI: 10.1016/j.jcorpfin.2022.102336
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    Cited by:

    1. Fan, Wei & Ying, Qianwei & Meng, Guo, 2023. "The signaling effect of policy loans: Do commercial banks follow up or stand by?," Finance Research Letters, Elsevier, vol. 56(C).

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    More about this item

    Keywords

    Information; Financial contracting; Interest rate; SMEs financing;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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