Bad Times, Good Credit

Bo Becker, Marieke Bos, Kasper Roszbach
2015 Social Science Research Network  
Can information problems explain the strong cyclicality of corporate lending? Asymmetric information between lenders and (potential) borrowers are understood to be a key friction in credit markets, and perhaps this is more severe in recessions and crises. Alternatively, separating potential borrowers of varying quality may be easier for financial intermediaries in bad times, if firm quality is more easily revealed. We test these opposing theories of information frictions in the corporate credit
more » ... market using data on lending from a large bank, through two business cycles. We find that this banks' ability to sort borrowers by credit quality is best in bad times. Information frictions in corporate credit markets do not appear important to the cycle.
doi:10.2139/ssrn.2587713 fatcat:pu2z7exzareodizxdrcyprlhje