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Naïve or Sophisticated? Information Disclosure and Investment Decisions in Peer-to-Peer Lending

Publication | January 2020
Naïve or Sophisticated? Information Disclosure and Investment Decisions in Peer-to-Peer Lending

In the absence of an effective credit scoring system, any voluntary information disclosure without verification could impair investment choices.

Despite the explosive growth of peer-to-peer lending in the People’s Republic of China (PRC), information asymmetry remains a critical issue and is likely to be amplified in such an evolving credit market compared to a traditional credit market. We study how investors screen the nonstandard, voluntary, and often unverifiable information disclosed by borrowers in making their investment decisions. Using data from the Renrendai P2P platform, one of the leading lending platforms in the PRC, we find that an additional item of disclosure increases the funding probability by 23.6%. The impact is even more remarkable for borrowers with a lower credit rating. However, investment in loan listings with more disclosures turns out to be riskier. An additional item of disclosure is accompanied by an incremental default probability of 11.7%. The puzzle that lenders remain attracted by such loan listings is explained by the higher profitability offered by the borrowers. Further investigation shows that investors can infer the real risk of borrowers marked by the disclosure.

WORKING PAPER NO: 1069