Information asymmetries in Brazil
After many years, Patrick Behr, Raquel de Freitas Oliveira and I have finalized a working paper draft gauging the impact of credit information sharing on access to and cost of small business finance in Brazil as well as labour market implications. We exploit an exogenous change in the reporting threshold of Brazil’s public credit registry in 2014 to gauge the impact of negative and positive borrower information becoming visible on intensive and extensive financing margins, loan conditionality, loan default and firm employment. Given the richness of the data, we can differentiate between borrowers of different risk profiles and lenders of different ownership.
We show an increase in borrowing for newly included risky firms and lower interest rates for safer firms. The additional lending comes primarily from new private bank-firm relationships, suggesting that privately-owned banks use this newly available information to reach out to these borrowers with transaction-based lending techniques. However, this comes at the cost of higher loan default for these loans compared to control firms, while across all other borrower and lender types there is a reduction in loan default following inclusion in the credit registry.
Newly visible borrowers see a reduction in interest rates from incumbent lenders, pointing to competition effects. While collateralization decreases, incumbent lenders shorten loan maturities, pointing to important changes in loan contract design: given higher competition, incumbent lenders use higher roll-over of loans as disciplining tool. Finally, the policy change translates into higher employment, especially for riskier firms. Our results are consistent with disciplining and competition hypotheses of information sharing and highlight important heterogeneities across firms’ risk profiles and lender types.