Information from Relationship Lending: Evidence from China

C. Chang, G. Liao, X. Yu, Z. Ni

Research output: Working paperDiscussion paperOther research output

Abstract

We study the economic role of banks’ soft information, which evolved from repeated lending relationships, in the context of loan default. Using a proprietary database from one of the largest state-owned commercial banks in China, we find that the bank’s internal credit rating scores play a significant role in default prediction. While the internal credit rating incorporates firm-specific hard information such as financial ratios, it is the soft information component of these ratings that contributes to the improvement in assessing credit quality. More importantly, the relative importance of soft information over hard information depends on the depth of the lending relationship. When evaluating loan delinquency, a strong lending relationship allows soft information to substitute for, rather than complement to, the role of hard information, especially the hard information that is subject to easy manipulation by Chinese firms.
Original languageEnglish
Place of PublicationTilburg
PublisherEBC
Number of pages40
Volume2009-10 S
Publication statusPublished - 2009

Publication series

NameEBC Discussion Paper
Volume2009-10 S

Fingerprint

China
Soft information
Relationship lending
Lending relationships
Loans
Credit rating
Relative importance
Rating
Default prediction
Financial ratios
Data base
Chinese firms
Substitute
Economics
Commercial banks
Manipulation
Credit

Keywords

  • Debt default
  • internal credit ratings
  • credit risk
  • relationship lending
  • soft information

Cite this

Chang, C., Liao, G., Yu, X., & Ni, Z. (2009). Information from Relationship Lending: Evidence from China. (EBC Discussion Paper; Vol. 2009-10 S). Tilburg: EBC.
Chang, C. ; Liao, G. ; Yu, X. ; Ni, Z. / Information from Relationship Lending : Evidence from China. Tilburg : EBC, 2009. (EBC Discussion Paper).
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abstract = "We study the economic role of banks’ soft information, which evolved from repeated lending relationships, in the context of loan default. Using a proprietary database from one of the largest state-owned commercial banks in China, we find that the bank’s internal credit rating scores play a significant role in default prediction. While the internal credit rating incorporates firm-specific hard information such as financial ratios, it is the soft information component of these ratings that contributes to the improvement in assessing credit quality. More importantly, the relative importance of soft information over hard information depends on the depth of the lending relationship. When evaluating loan delinquency, a strong lending relationship allows soft information to substitute for, rather than complement to, the role of hard information, especially the hard information that is subject to easy manipulation by Chinese firms.",
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Chang, C, Liao, G, Yu, X & Ni, Z 2009 'Information from Relationship Lending: Evidence from China' EBC Discussion Paper, vol. 2009-10 S, EBC, Tilburg.

Information from Relationship Lending : Evidence from China. / Chang, C.; Liao, G.; Yu, X.; Ni, Z.

Tilburg : EBC, 2009. (EBC Discussion Paper; Vol. 2009-10 S).

Research output: Working paperDiscussion paperOther research output

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T1 - Information from Relationship Lending

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AU - Ni, Z.

N1 - This is also CentER Discussion Paper 2009-39 S Pagination: 40

PY - 2009

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N2 - We study the economic role of banks’ soft information, which evolved from repeated lending relationships, in the context of loan default. Using a proprietary database from one of the largest state-owned commercial banks in China, we find that the bank’s internal credit rating scores play a significant role in default prediction. While the internal credit rating incorporates firm-specific hard information such as financial ratios, it is the soft information component of these ratings that contributes to the improvement in assessing credit quality. More importantly, the relative importance of soft information over hard information depends on the depth of the lending relationship. When evaluating loan delinquency, a strong lending relationship allows soft information to substitute for, rather than complement to, the role of hard information, especially the hard information that is subject to easy manipulation by Chinese firms.

AB - We study the economic role of banks’ soft information, which evolved from repeated lending relationships, in the context of loan default. Using a proprietary database from one of the largest state-owned commercial banks in China, we find that the bank’s internal credit rating scores play a significant role in default prediction. While the internal credit rating incorporates firm-specific hard information such as financial ratios, it is the soft information component of these ratings that contributes to the improvement in assessing credit quality. More importantly, the relative importance of soft information over hard information depends on the depth of the lending relationship. When evaluating loan delinquency, a strong lending relationship allows soft information to substitute for, rather than complement to, the role of hard information, especially the hard information that is subject to easy manipulation by Chinese firms.

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KW - credit risk

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Chang C, Liao G, Yu X, Ni Z. Information from Relationship Lending: Evidence from China. Tilburg: EBC. 2009. (EBC Discussion Paper).