Does credit reporting lead to a decline in relationship lending? Evidence from information sharing technology

Abstract

I examine how credit reporting affects where firms access credit and how lenders contract with them. I use within firm-time and lender-time tests that exploit lenders joining a credit bureau and sharing information in a staggered pattern. I find information sharing reduces relationship-switching costs, particularly for firms that are young, small, or have had no defaults. After sharing, lenders transition away from relationship contracting, in two ways: contract maturities in new relationships are shorter, and lenders are less willing to provide financing to their delinquent borrowers. My results highlight the mixed effects of transparency-improving financial technologies on credit availability. Keywords: Debt contracts; Information sharing; Information asymmetries; Hard and soft information; Credit bureaus; Relationship lending; Transactional lending; Information economics; Entrepreneurial finance; Credit reports; Credit scores; FinTech