514/2020 Antonio Accetturo, Giorgia Barboni, Michele Cascarano and Emilia Garcia-Appendini

Cultural proximity in credit markets can facilitate the transmission of subtle signals about the firm's credit quality but can also be a source of favourable treatment from lenders. New research shows that cultural proximity reduces information asymmetries by facilitating the screening of loan applications. Using loan data from South Tyrol, a region hosting two different cultural groups, our research finds a large predominance of lending relationships involving banks and firms of the same culture, particularly among small, young, and opaque firms. Loans to same-culture firms are larger, require less collateral, and default less often than loans to different-culture firms. Cultural proximity appears to reduce information asymmetries by providing a source of soft information that complements the one stemming from close or lengthy relationships.

Culture and Development