Seeking excess returns under a posted price mechanism: Evidence from a peer‐to‐peer lending market

Abstract

AbstractThis study examines the performance of a new online peer‐to‐peer (P2P) lending platform in China that relies on non‐expert individuals to screen for loans. Using the bank deposit rate as a benchmark, positive excess returns exist under the posted price mechanism, which indicates that P2P markets provide lenders with adequate profit opportunities to compensate for investment risks. Moreover, we find that loans with higher excess returns are more likely to be funded and are bid on more quickly than other loans. Finally, voluntarily disclosed soft information in the listing's description plays a significant moderating role in the lenders’ decision‐making process. Borrowers who promise to repay on time are more likely to be funded and to be funded faster, but those who claim economic hardship have a lower probability of being funded. Our results provide evidence that lenders have the ability to seek excess returns in P2P lending markets and highlight that aggregating the views of peers can improve the market efficiency.