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Bank beliefs and firm lending: evidence from Italian loan-level data

Author

Listed:
  • Paolo Farroni

    (Bank of Italy)

  • Jacopo Tozzo

    (Bank of Italy)

Abstract

We use a novel loan-level dataset containing borrower-specific probability of default to estimate a structural learning model where bankers endowed with diagnostic expectations receive noisy signal about firms' fundamentals and assess their creditworthiness. We find that: (i) intermediaries tend to overreact to both micro news and macro signals; (ii) the degree of overreaction is heterogeneous among banks; (iii) overreacting bankers lower (raise) interest rates more than rational ones, increase (decrease) loan size; and (iii) the probability of issuing a new loan rises (falls) when bankers receive positive (negative) signals.

Suggested Citation

  • Paolo Farroni & Jacopo Tozzo, 2024. "Bank beliefs and firm lending: evidence from Italian loan-level data," Temi di discussione (Economic working papers) 1469, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1469_24
    as

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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2024/2024-1469/en_tema_1469.pdf
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    References listed on IDEAS

    as
    1. Durbin, James & Koopman, Siem Jan, 2012. "Time Series Analysis by State Space Methods," OUP Catalogue, Oxford University Press, edition 2, number 9780199641178.
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    More about this item

    Keywords

    banks; expectations; credit risk;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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