Naïve or sophisticated? Information disclosure and investment decisions in peer to peer lending

Abstract

Despite the explosive growth of peer-to-peer lending in China, information asymmetry remains a critical issue and is likely to be amplified in such an evolving credit market compared to a traditional credit market. This paper studies how investors screen the nonstandard and often unverifiable information disclosed voluntarily by the borrowers to make their investment decisions. Using data from Renrendai, one of the leading P2P lending platforms in China, we find that the amount of information disclosed voluntarily by the borrowers can significantly improve the funding probability. The impact is even more remarkable for the borrowers with lower credit rating. However, the loan default probability increases with the amount of disclosure, indicating the possibility of information manipulation by the borrowers. Further investigation shows the puzzle that lenders remain attracted by such loan listings can be explained by the higher profitability offered by the borrowers. These findings imply the necessity of regulation on the information disclosure in the P2P lending