Public information and coordination

Evidence from a credit registry expansion

J.M. Liberti, A. Herzberg, D. Paravisini

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This paper provides evidence that lenders to a firm close to distress have incentives to coordinate: lower financing by one lender reduces firm creditworthiness and causes other lenders to reduce financing. To isolate the coordination channel from lenders' joint reaction to new information, we exploit a natural experiment that forced lenders to share negative private assessments about their borrowers. We show that lenders, while learning nothing new about the firm, reduce credit in anticipation of other lenders' reaction to the negative news about the firm. The results show that public information exacerbates lender coordination and increases the incidence of firm financial distress.
Original languageEnglish
Pages (from-to)379-412
JournalJournal of Finance
Volume66
Issue number2
Publication statusPublished - 2011

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Financing
Registry
Public information
Credit
Financial distress
Anticipation
Creditworthiness
Natural experiment
News
Incentives
Channel coordination
Distress

Cite this

Liberti, J. M., Herzberg, A., & Paravisini, D. (2011). Public information and coordination: Evidence from a credit registry expansion. Journal of Finance, 66(2), 379-412.
Liberti, J.M. ; Herzberg, A. ; Paravisini, D. / Public information and coordination : Evidence from a credit registry expansion. In: Journal of Finance. 2011 ; Vol. 66, No. 2. pp. 379-412.
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Liberti, JM, Herzberg, A & Paravisini, D 2011, 'Public information and coordination: Evidence from a credit registry expansion', Journal of Finance, vol. 66, no. 2, pp. 379-412.

Public information and coordination : Evidence from a credit registry expansion. / Liberti, J.M.; Herzberg, A.; Paravisini, D.

In: Journal of Finance, Vol. 66, No. 2, 2011, p. 379-412.

Research output: Contribution to journalArticleScientificpeer-review

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N2 - This paper provides evidence that lenders to a firm close to distress have incentives to coordinate: lower financing by one lender reduces firm creditworthiness and causes other lenders to reduce financing. To isolate the coordination channel from lenders' joint reaction to new information, we exploit a natural experiment that forced lenders to share negative private assessments about their borrowers. We show that lenders, while learning nothing new about the firm, reduce credit in anticipation of other lenders' reaction to the negative news about the firm. The results show that public information exacerbates lender coordination and increases the incidence of firm financial distress.

AB - This paper provides evidence that lenders to a firm close to distress have incentives to coordinate: lower financing by one lender reduces firm creditworthiness and causes other lenders to reduce financing. To isolate the coordination channel from lenders' joint reaction to new information, we exploit a natural experiment that forced lenders to share negative private assessments about their borrowers. We show that lenders, while learning nothing new about the firm, reduce credit in anticipation of other lenders' reaction to the negative news about the firm. The results show that public information exacerbates lender coordination and increases the incidence of firm financial distress.

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