Product Network Connectivity and Information for Loan Pricing

Abstract

A theory predicts that loan pricing is less sensitive to public information, such as a credit score provided by a credit information vendor, if the lender obtains more accurate private information about the credit quality of borrowers. We find that loan pricing is less sensitive to public information when a borrower is more connected with other borrowers of the lender through a supply network by using a unique database of inter-firm relationships and bank-firm relationships. This effect is significant statistically and economically after controlling for the bank-firm or inter-firm relationship characteristics and other firm characteristics. This finding provides evidence that banks make use of private information observed from their borrowers' network in their loan pricing.