Does More Information Lead to More Financing ? Local Information Shocks and Bank Credit ?

It is widely argued that increased information should lead to more financing for firms, but there is relatively little direct evidence on this question. We analyze information shocks generated by exchange-rate-induced movements of Peruvian firms across a regulatory threshold that influences information generation by banks. Firms that cross the threshold experience both reduced information asymmetries and a changed regulatory status, and the combined impact results in more bank financing. Neighboring firms subject to a pure decrease in information asymmetries, by contrast, receive less bank financing, and the overall effect across all firms is that more information leads to less credit from banks. *Garmaise is at UCLA Anderson. Natividad is at NYU Stern. This document has been officially screened by Superintendencia de Banca, Seguros, y AFP del Peru (SBS) to ensure that no confidential information is revealed. We are grateful to SBS for access to the banking data, to Analytics and Angel de Las Casas for geocoded data, and to Kenneth Ahern and audiences at NYU, UC Berkeley, SBS, the Peruvian Central Bank, Universidad de Piura, the Frankfurt School of Finance and Management, ESMT in Berlin, the European Business School in Oestrich-Winkel, the University of Alicante, Universidad Autonoma de Madrid, the Dartmouth strategy camp, and the NBER for useful comments. Javier Romero Haaker provided valuable research assistance. Garmaise gratefully acknowledges support from the Ziman Center for Real Estate and the Center for Global Management at UCLA. Do information frictions impede the financing of small businesses? Some economists and policymakers have argued that information asymmetries between creditors and borrowers can lead to the under-provision of financing and credit rationing of small firms. This suggests that small businesses may chronically under-invest, a condition potentially requiring remediation by special government programs or subsidies. A counter-argument, however, is that asymmetric information has no impact on the funding of small firm or may even lead to excessive financing. If this counter-claim is correct, then the financing of small firms does not require any particular policy attention. Distinguishing between these arguments requires clear evidence. Theories of asymmetric information, however, are not always straightforward to test. In this paper we empirically assess the extent to which small firms in the emerging market of Peru are subject to information-driven credit rationing. There is some prior empirical work that has found that rationing is an important feature of credit markets, particularly for small firms. Much of this research has emphasized the role of bank-firm relationships in overcoming adverse selection and promoting lending (Petersen and Rajan (1994), Elsas and Krahnen (1998) and Lehmann and Neuberger (2001)). Other studies have argued that asymmetric information increases collateral requirements (Jiménez, Salas and Saurina (2006) and Berger et al. (2011)), which may restrict the borrowing ability of firms with few hard assets. A countervailing literature, however, has claimed that credit rationing has little empirical importance (Berger and Udell (1992), Cressy (1996) and Caling and Lundberg (2005)). The chief difficulty in distinguishing between these contrasting findings is that exogenous information shocks are not easy to find. As a result, it has proven challenging to identify changes in the degree of credit rationing that are clearly information-driven. This is a general problem in testing the implications of information models of financing. From an empirical perspective, therefore, it is very much an open