Access to Credit in Informal Economies: Does Financial Information Matter?

Traders operating in informal economies, characterized by low economic development and growth, rarely use financial information in their credit allocation decisions. However, using this information could improve the efficiency of lending decisions, thereby increasing access to credit and promoting economic growth. We use a combination of survey questions and a hypothetical choice experiment to study traders’ preferences for financial information in a bazaar economy. Although wholesalers value informal information such as retailers’ community membership and relationship length, they also overwhelmingly value retailers’ sales and profits in making credit decisions. Based on estimates of wholesalers’ willingness to pay for various types of retailer information and retailers’ responses to survey questions, our findings suggest that the perceived lack of reliability of financial information, rather than financial illiteracy, drives the current sparse use of financial information

The Role of CDS Trading in the Commercialization of New Lending Relationships

We investigate how the development of the credit default swap (CDS) market affects lenders’ incentives to initiate new lending relationships. We predict that CDSs reduce the adverse selection that non-relationship lenders face when competing for loans, by allowing those lenders to hedge loan exposure and by the revelation of private information through CDS spreads. We find that, following CDS initiation on a borrower’s debt, non-relationship lead arrangers are more likely to originate its loans and non-relationship participants are more likely to join loan syndicates. We also show that lead arrangers that initiate lending relationships following CDS initiation focus more on commercial aspects of lending relationship. These lead arrangers are more likely to pursue new borrowers with high cross-selling potential, which are expected to generate substantial fee business. Further, non-relationship lenders have lower incentives for costly borrower monitoring, as reflected in weaker control rights and in the lower loan share they retain. Relative to relationship lenders, non-relationship lenders are likely to be more distant from borrowers, foreign, and less reputable once CDSs become available, emphasizing their lower monitoring efficiency

The Informational Role of the Media in Private Lending

ABSTRACT We investigate whether a borrower's media coverage influences the syndicated loan origination and participation decisions of informationally disadvantaged lenders, loan syndicate structures, and interest spreads. In syndicated loan deals, information asymmetries can exist between lenders that have a relationship with a borrower and less informed, nonrelationship lenders competing to serve as lead arranger on a syndicated loan, and also between lead arrangers and less informed syndicate participants. Theory suggests that the aggressiveness with which less informed lenders compete for a loan deal increases in the sentiment of public information signals about a borrower. We extend this theory to syndicated loans and hypothesize that the likelihood of less informed lenders serving as the lead arranger or joining a loan syndicate is increasing in the sentiment of media‐initiated, borrower‐specific articles published prior to loan origination. We find that as media sentiment increases (1) outside, nonrelationship lenders have a higher probability of originating loans; (2) syndicate participants are less likely to have a previous relationship with the borrower or lead bank; (3) lead banks retain a lower percentage of loans; and (4) loan spreads decrease

The Informational Role of the Media in Private Lending

We investigate whether a borrower’s media coverage influences the syndicated loan origination and participation decisions of informationally disadvantaged lenders, loan syndicate structures, and interest spreads. In syndicated loan deals, information asymmetries can exist between lenders that have a relationship with a borrower and less informed, nonrelationship lenders competing to serve as lead arranger on a syndicated loan, and also between lead arrangers and less informed syndicate participants. Theory suggests that the aggressiveness with which less informed lenders compete for a loan deal increases in the sentiment of public information signals about a borrower. We extend this theory to syndicated loans and hypothesize that the likelihood of less informed lenders serving as the lead arranger or joining a loan syndicate is increasing in the sentiment of mediaâ initiated, borrowerâ specific articles published prior to loan origination. We find that as media sentiment increases (1) outside, nonrelationship lenders have a higher probability of originating loans; (2) syndicate participants are less likely to have a previous relationship with the borrower or lead bank; (3) lead banks retain a lower percentage of loans; and (4) loan spreads decrease.Peer Reviewedhttps://deepblue.lib.umich.edu/bitstream/2027.42/136338/1/joar12131_am.pdfhttps://deepblue.lib.umich.edu/bitstream/2027.42/136338/2/joar12131.pd

Accounting quality and debt concentration

Singapore Management Universit

Similarity in the restrictiveness of bond covenants

We examine the economic determinants and consequences associated with the inclusion of covenants with similar levels of restrictiveness in bond contracts. Using a unique Moody’s bond covenant dataset, we develop measures that capture similarity in the restrictiveness of bond covenants relative to previously issued peer bonds. We document that the demand for similarity by issuers, their advisors and bond investors follows the predictions of sociological and economic theories. Further, consistent with similarity in covenants reducing bond investors’ information acquisition and processing costs, we show that bonds with more similar covenant restrictiveness receive lower yields at issuance. These bonds are also more likely to be held by long-term bond investors, such as insurance companies, and are characterized by greater liquidity in the secondary market, providing a partial explanation for the lower bond yields. Our results highlight the benefits of covenant similarity and suggest that the use of covenants with similar restrictiveness levels brings information acquisition and processing cost savings that may be larger than the monitoring benefits provided by covenants with more tailored features