Information: Hard and Soft

Abstract

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Soft Information Production in Sme Lending

“…We admit that face‐to‐face contact is an imperfect measure of soft information because this information may also be collected through other channels, including assessments of a borrower's future prospects culled from contacts with the borrower's suppliers, customers, competitors, or neighboring businesses. However, because the derivation and acceptance of a perfect measure of soft information is far off (Liberti and Petersen ; Uchida, Udell, and Yamori ), we believe that this imperfect measure is better than no measure at all.…”

“…The relationship lending literature uses the term “soft” to denote information that cannot be objectively verified by a third party and that is difficult to completely summarize as a numeric score (Liberti and Petersen ). Examples of this type of information include economic projections, statements about management's plans, assessments of management quality, product market position, and organizational honesty.…”

“…Examples of this type of information include economic projections, statements about management's plans, assessments of management quality, product market position, and organizational honesty. This list is not exhaustive because of the nature of soft information, which makes it difficult to explicitly distinguish between hard and soft information (Liberti and Petersen ). In the finance literature, hard information is almost always coded numerically and includes items such as financial statements, payment histories, credit register data, stock returns, and quantity output numbers.…”

“…In this article, we investigate empirically the production of soft information through an analysis of the determinants of bank–firm contacts. In particular, as in the earlier literature (see, e.g., Liberti and Petersen ; Agarwal and Hauswald ; Berger and Black ), we assume that loan officers collect soft information primarily through face‐to‐face contacts with borrowers. We then use the number of contacts as a proxy for the amount of soft information produced.…”

“…This type of information is thought to be accessible exclusively to a primary lender and cannot be unambiguously documented in a report that a loan officer could present to superiors. Compared to the use of “hard” information, the use of such private information across a bank's organizational layers can be difficult and is primarily employed in relationship‐based banking that accrues importance as it ascends the hierarchical ladder (Liberti and Petersen ; Liberti and Mian ).…”