Bankruptcy Exemption and Peer-to-Peer Lending

ABSTRACT

The effects of personal bankruptcy law on the activities of traditional credit markets have attracted significant interests in many studies. In this study, we focus on the online Peer-to-Peer (P2P) lending market, and empirically investigate whether and to what extent personal bankruptcy law may affect the borrowing and lending activities in the P2P market. We find that state bankruptcy exemptions are positively associated with the likelihood of loan rejections and loan defaults. In addition, we document that state bankruptcy exmptions are associated with higher interest rates, and this effect is more prominent for wealthier borrowers. We also report that state bankruptcy exemptions are associated with smaller loan amount, and this effect is more prominent for borrowers with lower levels of assets. Our results are consistent with theories that state bankruptcy exemptions redistribute credit to wealthier borrowers.

KEYWORDS:

• Bankruptcy exemption
• P2P lending
• loan default

Notes

1. https://newsroom.transunion.com/fintechs-taking-larger-share-of-personal-loan-market-while-increasing-portfolio-risk-return-performance/

2. For robustness check, we also partition our sample using the median of the annual income of borrowers in each year to categorize high-income borrowers and low-income borrowers. We re-run regression analyses and obtain qualitatively similar results.

3. For brevity, we do not report the regression results of these robustness checks, but they are available upon request.

Additional information

Funding

This work was supported by the Key Project of The Social Science Fund of Shandong Province [20BGLJ02].