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Information disclosure and the choice between arm’s-length and inside debt

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  • Agarwal, Sumit
  • Hauswald, Robert

Abstract

To study the consequences of information disclosure on economic exchange, we compare the differential information content of in-person (inside) and online (arm’s-length) loans. Confidential disclosures crucially shape the strategic dynamics of bank-borrower interaction and lead to trade-offs between the availability and pricing of credit. Inside debt carries higher interest but is more readily available whereas the opposite holds true for arm’s-length loans. Anticipating the bank’s use of inside information, firms strategically disclose information and switch lenders, which ultimately affects default. The observed availability-price trade-off corresponds to a novel mechanism for mitigating adverse selection relying on self-selection and disclosure.

Suggested Citation

  • Agarwal, Sumit & Hauswald, Robert, 2021. "Information disclosure and the choice between arm’s-length and inside debt," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 1008-1022.
    • Handle: RePEc:eee:moneco:v:117:y:2021:i:c:p:1008-1022
    DOI: 10.1016/j.jmoneco.2020.08.001
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    Cited by:

    1. Ho, Kung-Cheng & Yen, Huang-Ping & Lu, Canyi & Lee, Shih-Cheng, 2023. "Does information disclosure and transparency ranking system prevent the default risk of a firm?," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 1089-1105.
    2. Blomkvist, Magnus & Korkeamäki, Timo & Takalo, Tuomas, 2022. "Learning and staged equity financing," Journal of Corporate Finance, Elsevier, vol. 74(C).
    3. Miguel Acosta-Henao & Sangeeta Pratap & Manuel Taboada, 2023. "Relationship Lending: Characteristics and Real Effects," Working Papers Central Bank of Chile 999, Central Bank of Chile.

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    More about this item

    Keywords

    Information disclosure; Debt type; Credit screening; Information content;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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