Highlights
- Reforms in public credit registries (PCRs) improve firms’ investment efficiency through improved credit information sharing.
- PCR reforms result in better financing conditions, including longer loan maturities, fewer covenants, and reduced collateral requirements. Additionally, borrowers tend to maintain better credit behaviour, which diminishes default risk and supports better subsequent access to increased capital for growth.
- The positive effects of PCR reforms are especially pronounced for firms that rely on debt, operate in environments with limited information transparency, or where credit data is tightly controlled. These reforms contribute to broader macroeconomic benefits by facilitating more efficient capital allocation.
This study examined how credit information sharing influenced firms’ investment efficiency, focusing on reforms across a selection of European countries’ public credit registries (PCRs). PCRs are centralised data repositories maintained by the respective country’s central bank that collect and share the credit histories of its borrowers. The study’s primary hypothesis was that credit information sharing enhances investment efficiency by enabling lenders to screen borrowers better and foster better borrower discipline.
One core mechanism was that credit information sharing reduces poor selection prior to loan contracting by allowing lenders to more accurately assess borrowers’ creditworthiness. This improved screening increases a lender’s willingness to extend credit, thereby easing a firm’s access to external financing needed for growth-related investments. After a loan is granted, shared credit information encourages borrowers to maintain good credit behaviour. Knowing that their credit history is accessible to multiple lenders, borrowers are more likely to maintain repayment obligations, and this enhances borrower discipline. This discipline also discourages poor investments, reduce the likelihood of credit problems, and thus cause lenders to be more willing to provide ongoing or additional financing.
To empirically investigate these mechanisms, the researchers exploited the staggered implementation of PCR reforms across a selection of European countries. Financial data was drawn from the Compustat Global database.
Study treatment firms were from countries that had post-2004 PCR reform, and control firms were from countries that did not have a PCR. Treatment countries with PCR reforms spanned from 2007 (in France) to 2017 (in Ireland). Regarding the final samples’ relative representational percentages, the top-three countries were Germany (17.22%), France (15.59%), and Italy (8.17%). The top-three control countries’ representational percentages were the UK (19.90%), Switzerland (6.67%), and Greece (4.05%).
The study employed a difference-in-differences (DiD) approach, combined with propensity scores matched to address within-system concerns related to macroeconomic factors or regulatory initiatives. This strategy helped isolate the effect of PCR reforms on firms’ investment efficiency.
To measure such investment efficiency, the researchers used investment-q sensitivity, which reflects a firm’s investment responsiveness ti growth or development opportunities.
The results showed that firms in countries that implemented PCR reforms experienced a significant increase in investment efficiency post-reform. Specifically, the decrease in investment cash flow indicates that PCR reforms can ease financial constraints, letting firms finance investments more through external sources than through internal means.
Additional cross-sectional analyses revealed that the positive effects from PCR reforms were more pronounced when firms relied on debt financing, when credit information was more accessible, when firms operated in opaque informational environments, and when the national banking systems exhibited higher information monopoly. This suggests that debt financing acts as a channel by which credit information sharing improves investment outcomes, primarily by strengthening borrower screening and discipline.
Analysis relating to coverage, information collection, and enforcement further supported how reforms would lead to more effective credit information sharing and that this resulted in larger financing benefits.
At the borrower, bank, and loan levels, the data showed that PCR reforms facilitate better debt financing conditions. Post-PCR reform, borrowers also benefited from longer loan maturities, fewer loan covenants, and less collateral requirements. The improved loan terms support the finding that enhanced credit information sharing lets lenders better assess and monitor borrowers, reducing informational asymmetries and risk.
The study underscores that credit information sharing is conceptually distinct from other information-related factors, such as financial reporting quality. The difference is that credit information sharing addresses a lender’s informational asymmetries about borrowers’ credit conditions.
A key implication is that PCR reforms reduce the sensitivity of investment to internal cash flows. Post-reform, improved credit information sharing alleviated financing frictions, and as a result, firms had more efficient capital allocation.
The study findings suggest that credit information sharing can be a powerful tool for improving firms’ investment efficiency, which further contributes to greater economic development and growth, and broader macroeconomic benefits.
Learn more from the full research article here: https://doi.org/10.1111/1911-3846.12972
