Highlights
- The establishment of a national public credit registry (PCR) significantly increases firm innovation, as evidenced by a 17.8% rise in patents and a 35.3% rise in patent citations, by alleviating information asymmetry and reducing financing frictions.
- Credit information sharing through PCRs has a disciplinary effect on borrower behavior, mitigating moral hazard, and encourages banks to be more willing to lend to innovative firms.
- Credit information sharing facilitates R&D investment and improves innovation efficiency, contributing positively to economic growth and social welfare.
This study examined the effect of credit information sharing on corporate innovation. Although innovation is important for firm growth, these activities tend to have highly uncertain payoffs. Obtaining financing for such activities is constrained by frictions that arise from capital providers’ concern that information asymmetry can lead to adverse selection and moral hazard. Debt providers may also be unwilling to finance innovation due to the asymmetric payoff function, the difficulty of securing loans using innovation outputs, and borrowers’ potential risk-shifting.
The establishment of a national public credit registry (PCR) can alleviate the bank debt financing frictions that arise from information asymmetry. Initiated and managed by government regulators, a PCR is a mandatory credit information sharing system that collects and distributes detailed information on the credit histories of individual and commercial borrowers. PCRs bridge the information gap between lenders and borrowers by providing data on borrowers’ payment history, general credit merits, and overall debt exposure across lenders.
Whether credit information sharing benefits firm innovation or not is subject to debate. Recent literature advocates debt financing as an important source of financing for innovation. Nevertheless, obtaining debt finance presents innovative firms with unique challenges, because innovative firms are more likely to have adverse selection problems due to information asymmetry caused by the inherent risk associated with R&D investment.
Given that borrowers’ credit records are shared among lenders, the information-sharing mechanism can also have disciplinary effects on borrower behavior that mitigate moral hazard.
The researchers argue that credit information sharing among banks can help to mitigate these financing frictions and facilitate innovation. Specifically, that information shared through a PCR reduces adverse selection that arises from information asymmetry between lenders and borrowers before debt contracting. Given that borrowers’ credit records are shared among lenders, the information-sharing mechanism can also have disciplinary effects on borrower behavior that mitigate moral hazard. The competition induced by credit information sharing may also encourage banks to increase their risk tolerance and willingness to lend to innovative firms.
To examine whether and how credit information sharing affects firm innovation, the researchers exploited the staggered initiation of PCRs as a series of individual shocks to credit information sharing between lenders. They obtained data on PCR establishment mainly from Balakrishnan and Ertan (2021), with supplemental information from official announcements. Using global patent data from the European Patent Office, they measured firm innovation based on firms’ patent count (output quantity) and citations (output quality).
Drawing on a novel international data set that combines country-level characteristics and firm-level financial and patenting data, they implemented a generalized difference-in-differences (DiD) research design with firm and year fixed effects. The treatment group comprised 12 economies that established their PCRs during our 1991–2018 sample period; the control group included 29 economies that did not establish a PCR by the end of 2018.
Based on the baseline model estimation, PCR establishment leads to an increase of 17.8% and 35.3% in the annual number of patents and citations, respectively, relative to firms located in countries that do not establish a PCR.
The researchers found that firm innovation increased following PCR establishment. This is consistent with the view that credit information sharing among lenders mitigates their concern about lending to innovative firms, which in turn facilitates firm innovation. Based on the baseline model estimation, PCR establishment leads to an increase of 17.8% and 35.3% in the annual number of patents and citations, respectively, relative to firms located in countries that do not establish a PCR. To establish causality, the researchers validated the parallel trend assumption by showing that before PCR establishment, the treatment and control groups exhibited parallel trends vis-à-vis firm innovation. They also showed that the effect of a PCR on innovation increased over time.
The researchers used the establishment of a PCR to investigate how information sharing among lenders promotes borrowers’ innovation outcomes. Results showed that credit information sharing is positively associated with firm innovation, especially in firms that experience significant improvement in external bank debt financing and firms in economies with increased bank competition. This is consistent with the idea that credit information sharing promotes firm innovation by alleviating financing frictions. The effect of credit information sharing on innovation was more pronounced when the established PCR had characteristics that promote credit information sharing. There was also a stronger effect for firms that are more opaque and for firms in innovation-intensive industries. The findings also show that credit information sharing can facilitate R&D investment and innovation efficiency.
Firms across countries may differ in terms of their financing needs and innovativeness, thus contributing to differences in innovation and innovation efficiency after PCR establishment.
It must be noted that PCR establishment is not exogenous; economies choose to establish a PCR. Firms across countries may differ in terms of their financing needs and innovativeness, thus contributing to differences in innovation and innovation efficiency after PCR establishment. Although the researchers relied on a large array of control variables and several robustness tests to address potential endogeneity in PCR establishment, causal inferences could have been constrained by limitations in the research setting. In particular, international data limitations prevented the inclusion of additional control variables, such as those used in the United States’ innovation literature (e.g., corporate governance measures) to mitigate the omitted correlated variables. Moreover, the heterogeneity of institutional characteristics must be considered when generalizing study findings to a wider set of countries, especially those with advanced economies.
Despite the caveats, the researchers believe the study’s findings are relevant to the accounting literature on the real economic impact of enhancements to the information available to lenders when they make credit decisions. The study also contributes to the literature on the potential economic consequences and externalities of credit information sharing. The information asymmetry between lenders and borrowers creates an implicit barrier to firms’ external debt financing. Study findings are consistent with the idea that lenders use the improved information from information sharing to make better decisions about how to allocate capital between borrowers. In particular, this study addresses the impact of information sharing on firm innovation, which is essential for improving country-level economic growth and social welfare.
Keywords: Bank debt financing, Credit information sharing, Firm innovation, Information asymmetry, Public credit registry
* Learn more from the full research article here:
https://onlinelibrary.wiley.com/doi/10.1111/1911-3846.13016
