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The Review of Corporate Finance Studies Vol. 13 No. 1 2024

Social Proximity, Information, and Incentives in Local Bank Lending

Junbo Wang1; Yun Wang2; Chunchi Wu3; Xiaoguang Yang4; Lin Zhao5

1 City University of Hong Kong · 2 School of Banking and Finance, University of International Business and Economics · 3 State University of New York at Buffalo · 4 Academy of Mathematics and Systems Science, Chinese Academy of Sciences School of Economics and Management, University of Chinese Academy of Sciences · 5 School of Business Administration, Southwestern University of Finance and Economics

Abstract

Exploring the role of social proximity in bank lending using a proprietary data set, we uncover evidence of a significant social proximity effect on private information acquisition. Local loan officers have better information to identify higher-quality borrowers through improved screening. This advantage is greater when firms have higher information asymmetry and lower ratings. Results suggest that sociocultural resources drive locals’ informational advantages and improve their lending performance. Importantly, we find that the social proximity advantage interacts with loan officer incentives. Strong evidence suggests that loan officers can be incentivized to use their social proximity advantage to make better loans.

DOI
10.1093/rcfs/cfab011
Volume
13
Issue
1
Pages
80-146
Language
en
Sources
openalex bibtex:phds-export.bib crossref

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