The Informational Role of Ownership Networks in Loan Monitoring

We study the informational role of interfirm ownership networks in loan monitoring. Using comprehensive data on monthly internal rating changes of individual corporate loans in China, we directly measure banks' soft information by tracing whether banks downgrade ratings before delinquency. We find that banks can predict delinquency events more accurately when borrowers are connected via ownership networks to banks' local customers. This informational role of the network is enhanced when formal bank monitoring costs are high due to increased lender-borrower geographic distance. Moreover, the network is more important for the information transmission of small firms