Information Salience and Credit Supply: Evidence from Payment Defaults on Trade Bills

This paper provides novel evidence that information salience shapes banks’ lending decisions. We use a setting in which information about a borrower’s payment default on trade bills is available to all banks, but it appears more prominently to the bank managing the payment transaction (the reporting bank). We show that reporting banks reduce lending to defaulting borrowers more than other lenders. This effect is more pronounced when the default information presents salient attributes unrelated to the borrower’s creditworthiness and for the branch of the reporting bank that directly observes the missed payment. Information gaps between the reporting bank and other lenders cannot explain our findings.